आयकर अऩीऱीय अधधकरण, ददऱी विशेष यायऩीठ , नई ददऱी । IN THE INCOME TAX APPELLATE TRIBUNAL DELHI SPECIAL BENCH, NEW DELHI सिवी जी.डी. अिाऱ, उऩाय, आर.एस. याऱ, ऱेखा सदय एिं हरर ओम मराठा, याययक सदय, के सम । Before Shri G.D.Agarwal, VP, Shri R.S.Syal, AM and Shri Hari Om Maratha, JM आयकर अऩीऱ सं ./ITA No.5140/Del/2011 ( यनधावरण िषव / Assessment Year : 2007-2008) M/s.L.G.Electronics India Private Limited Plot No.51, Udyog Vihar Surajpur Kasna Road, Greater Noida Gautam Budh Nagar (U.P.) PAN : बनाम / Vs. The Asstt.Commissioner of Income-tax Circle - 3 Noida. (अऩीऱाथी /Appellant) (यथी/Respondent) अऩीऱाथी की ओर से /Appellant by : Shri Ajay Vohra, Advocate, Shri Neeraj Jain, CA, Shri Ramit Katyal, CA & Shri Abhishek Aggarwal, CA यथी की ओर से /Respondent by : Shri K.G.C.Srivastava, Special Counsel, Shri Peeyush Jain, CIT-DR & Ms.Preeti Bhardwaj सुनिाई की तारीख / Date of Hearing : 08.11.2012 घोषणा की तारीख / Date of Pronouncement : .01.2013 INTERVENERS Sl. No. ITA no. & Asstt. Yr. Name of the party Represented by 1. 5638/D/2011 – 2007-08 M/s Haier Telecom Pvt. Ltd. Sh. Ashwani Taneja Adv. 2. 4022/D/2010 – 2003-04 M/s LVMH Watch & Jewellery India P. L Sh. Vikas Srivastava Adv. 3 to 6. 3571/D/2010- 2005-06 4680/D/2010-2006-07 5235/D/2011 – 2007-08 4404/D/2012 – 2008-09 M/s Haier Applianeds India P. Ltd. Sh. Ajay Vohra Adv. With Sh. Neeraj Jain Sh. Ramit Katyal & Sh. AbhishekAggarwal CAs. 7. 5650/D/2011- 2007-08 M/s Goodyear India P. Ltd. -do- 8. 1148/Chd/2011-2007-08 M/s Glaxo Smithkline Consumer H. Ltd. -do- 9. 5237/D/2011-2005-06 M/s Maruti Suzuki India Ltd. Sh. S. Ganesh Sr. Adv. with Sh. Neeraj Jain CA http://www.itatonline.org
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आयकर अऩीऱीय अधधकरण, ददल्ऱी विशेष न्यायऩीठ, नई ददल्ऱी । IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI SPECIAL BENCH, NEW DELHI
सिवश्री जी.डी. अग्रिाऱ, उऩाध्यऺ, आर.एस. स्याऱ, ऱेखा सदस्य
एि ं हरर ओम मराठा, न्याययक सदस्य, के समऺ । Before Shri G.D.Agarwal, VP, Shri R.S.Syal, AM and
Shri Hari Om Maratha, JM
आयकर अऩीऱ स.ं/ITA No.5140/Del/2011
( यनधावरण िषव / Assessment Year : 2007-2008) M/s.L.G.Electronics India Private Limited
Plot No.51, Udyog Vihar
Surajpur Kasna Road, Greater Noida
Gautam Budh Nagar (U.P.)
PAN :
बनाम/ Vs.
The Asstt.Commissioner of Income-tax
Circle - 3
Noida.
(अऩीऱाथी /Appellant) (प्रत्यथी/Respondent)
अऩीऱाथी की ओर स े/Appellant by : Shri Ajay Vohra, Advocate,
Shri Neeraj Jain, CA,
Shri Ramit Katyal, CA &
Shri Abhishek Aggarwal, CA
प्रत्यथी की ओर स े/Respondent by : Shri K.G.C.Srivastava, Special Counsel,
Shri Peeyush Jain, CIT-DR &
Ms.Preeti Bhardwaj
सनुिाई की तारीख /
Date of Hearing : 08.11.2012
घोषणा की तारीख /
Date of Pronouncement : .01.2013
INTERVENERS Sl.
No.
ITA no. & Asstt. Yr. Name of the party Represented by
1. 5638/D/2011 – 2007-08 M/s Haier Telecom
Pvt. Ltd.
Sh. Ashwani Taneja Adv.
2. 4022/D/2010 – 2003-04 M/s LVMH Watch &
Jewellery India P. L
Sh. Vikas Srivastava Adv.
3 to
6.
3571/D/2010- 2005-06
4680/D/2010-2006-07
5235/D/2011 – 2007-08
4404/D/2012 – 2008-09
M/s Haier Applianeds
India P. Ltd.
Sh. Ajay Vohra Adv.
With Sh. Neeraj Jain
Sh. Ramit Katyal &
Sh. AbhishekAggarwal CAs.
7. 5650/D/2011- 2007-08 M/s Goodyear India P.
Ltd.
-do-
8. 1148/Chd/2011-2007-08 M/s Glaxo Smithkline
Consumer H. Ltd.
-do-
9. 5237/D/2011-2005-06 M/s Maruti Suzuki
India Ltd.
Sh. S. Ganesh Sr. Adv. with
Sh. Neeraj Jain CA
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ITA No.5140/Del/2011.
M/s.L.G.Electronics India Private Limited.
2
10. 4978/D/2011-2007-08 M/s Sony India P. Ltd. Sh. N. Venkatraman Sr. Adv.
with Sh. Manonnet Dalal
11 &
12
3861/D/2011-2006-07
4924/D/2011-2007-08
M/s Bausch & Lomb
Eyecare P. Ltd.
Sh.Mukesh Butani Adv. with
Sh. Rahul Yadav & Sh. Vishal
Kalra
13. 5826/D/2011-2007-08 M/s Fujifilm
Corporation
-do-
14 5593/D/2011-2007-08 M/s Cannon India P.
Ltd.
-do-
15
&16
5090/D/2010-2006-07
5685/D/2011-2007-08
M/s Daikin
Airconditioning India.
P. Ltd.
-do-
17. 4602/D/2010-2006-07 M/s Cannon India P.
Ltd.
Sh. M.S. Syali Sr. Adv. with
Sh. Tarandeep Singh
18. 4584/D/2011-2007-08 M/s Amadeus India P.
Ltd.
-do-
19 to
21
1370/Mum/09-2004-05
6030/Mum/09-2005-06
4675/Mum/09-2006-07
M/s Star India Pvt.
Ltd.
Sh. S. Ganesh Sr. Adv. with
Sh. Sunil Agrawal Adv.
22. 1334/Ch/2010-2006-07 Pepsi Foods Pvt. Ltd. Sh. M.S. Syali Sr. Adv. with
Sh. Tarandeep Singh
आदेश / O R D E R
Per R.S.Syal (AM) :
The Hon‘ble President has constituted this Special Bench to
adjudicate the following two questions:
“1. Whether, on the facts and in circumstances of the
case, the Assessing Officer was justified in making
transfer pricing adjustment in relation to advertisement,
marketing and sales promotion expenses incurred by the
assessee?
2. Whether the Assessing Officer was justified in holding
that the assessee should have earned a mark up from the
Associated Enterprise in respect of AMP expenses alleged
to have been incurred for and on behalf of the AE?”
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ITA No.5140/Del/2011.
M/s.L.G.Electronics India Private Limited.
3
2. The factual matrix of the case is that L.G. Electronics Inc.
(hereinafter called as ―LGK‖), is a Korean based company, engaged
in the business of manufacture, sale and distribution of electronic
products and electrical appliances such as television, audio/video
equipments, washing machines, refrigerators and air-conditioners etc.
Pursuant to the approval of the Govt. of India, conveyed vide letter
dated 29-1-1997, LGK was permitted to establish a wholly owned
subsidiary in India. L.G. Electronics India Pvt. Ltd. (hereinafter
called as ―LGI‖), that is the assessee in question, was incorporated in
1997 as a wholly owned subsidiary of LGK. An agreement was
entered between LGK and LGI on 10th
March 1997, as per which
both entered into a mutual foreign collaboration agreement.
Thereafter a Technical assistance and royalty agreement was entered
into between these two entities on 1-7-2001 by which LGI, in the
capacity of a licensee, obtained a right to use the technical
information, designs, drawings and industrial property rights for the
manufacture, marketing, sale and services of the agreed products
from the LGK i.e. the licensor. As per the agreement, the assessee
agreed to pay royalty to LGK at the rate of 1% as a consideration for
the use of industrial property rights, designs and technical knowhow,
for the manufacture and sale of the greed products. The licensor
allowed the licensee to use its brand name and trade marks to
products manufactured in India during the validity period of the
agreement, which in the instant case is ―without any restriction‖.
Article 7 of this agreement with caption `Use of `LG‘ Brand name &
trade marks‘ provides that : `The Licensor hereby allows the Licensee
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4
for the use of its Brand Name and Trade Marks for the licensed
products manufactured in India during the validity period of the
Agreement‘. Second para of this article further states that : ―In case
at any stage in future the Licensor demands any royalty payment on
this account, the Licensee will take steps to get the Government of
India‘s approval for payment of such royalty payment‖. It is not the
case of the Revenue that the licensor demanded any royalty payment
for use of LG brand name and trade marks during the year in
question. The Assessing Officer (hereinafter also called `the AO‘)
referred the international transactions reported by the assessee to the
Transfer Pricing Officer (hereinafter called `the TPO‘). One of such
transactions included in the assessee‘s audit report was ―Contribution
towards Global Cricket Sponsorship‖. The TPO observed that the
assessee had received contribution from its Associated Enterprise
(hereinafter called the `AE‘) for the expenditure incurred on
sponsorship of Global Cricket events. The quantum of contribution
received was considered as a part contribution for the brand
promotion carried out by the assessee on behalf of its foreign AE.
The TPO observed that the assessee‘s expenses on advertisement,
marketing and promotion including trade discount and volume
rebate, described by him as Advertising, Marketing and Promotion
(hereinafter called `the AMP expenses‘) were 3.85% of its sales at
`6553.36 crore. He computed similar percentage in the case of
Videocon Appliances Ltd. (0.12%) and Whirlpool of India Ltd
(2.66%) with their arithmetic mean at 1.39%. It was opined that the
assessee was promoting LG brand owned by its foreign AE and hence
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ITA No.5140/Del/2011.
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5
should have been adequately compensated by the foreign AE.
Applying the Bright Line Test, the TPO held that the expenses up to
1.39% of the sales should be considered as having been incurred for
the assessee‘s own business and the remaining part which is in excess
of such percentage, at 2.46% (3.85% - 1.39%) on brand promotion of
the foreign AE. Such excess at `161,21,99,499/- was proposed as a
transfer pricing adjustment on account of AMP expenses for brand
building.
3. Before the Dispute Resolution Panel (hereinafter called `the
DRP‘), it was contended on behalf of the assessee that the total AMP
expenses so incurred helped in increasing its sales activity and hence
no part of the same could be considered as unrelated to its business,
being in the nature of brand building for the foreign AE. It was also
put forth that the LG brand was in existence globally even before the
assessee started its operations in India. Thus it was pleaded that the
assessee did not have any occasion to create this brand in India. The
assessee also claimed that brand name was available to it without
paying any brand royalty, which was an important factor to be kept in
mind. Even if such expenses resulted in creation of a brand in India,
the assessee contended that no further amount was attributable to
such brand creation on account of its higher profitability and non-
payment of brand royalty.
4. The DRP found that the assessee incurred extraordinary AMP
expenses for the promotion and development of LG brand in India.
The assessee‘s contention that the incurring of such expenses did not
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ITA No.5140/Del/2011.
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6
lead to the promotion of brand in India, was found to be not tenable.
The DRP concurred with the view taken by the AO in the draft order
prepared by the AO u/s 144C in making adjustment of `161.21 crore.
It was further observed by the DRP that TPO had not charged mark-
up on such AMP expenses. The same was found warranted as the
assessee‘s activity required not only the deployment of its funds but
also entrepreneur‘s efforts including the use of its infrastructure.
Opportunity cost was finalized at 10.50%, being the interest rate
charged by the banks; and compensation for the assessee‘s
entrepreneurial efforts was taken at 2.5% . Thus, the DRP came to
hold that the mark-up of 13% should have been applied on the
amount proposed for adjustment. At the same time, the DRP agreed
with the assessee‘s contention that no opportunity cost of 10.5%
should be charged on the expenses for which reimbursement was
received immediately after the same were incurred. Pursuant to
directions given by the DRP, the ld. AO passed order u/s 143(3) read
with sec. 144C on 31.10.2011 making additions, inter alia, of
`182.71 crore (inclusive of mark-up @ 13%) towards AMP expenses
on brand building incurred for and on behalf of its AE. The assessee
is aggrieved against such addition of `182.71 crore made by the AO.
5. We have heard Shri Ajay Vohra, Shri Ramit Katyal & Shri
Abhishek Aggarwal, the learned counsel representing the assessee
(hereinafter called the ld. counsel for the assessee /appellant) and Shri
G.C. Srivastava, Shri Peeyush Jain, the CIT-DR & Ms. Preeti
Bhardwaj (hereinafter called the ld. counsel for the
Revenue/Department). We have also heard several learned counsel http://www.itatonline.org
ITA No.5140/Del/2011.
M/s.L.G.Electronics India Private Limited.
7
for the interveners, namely, Shri M.S.Syali & Shri Tarandeep Singh
for M/s. Cannon India P. Ltd., M/s. Amadeus India P. Ltd. and M/s.
Pepsi Foods P. Ltd., Shri S.Ganesh & Shri Neeraj Jain for M/s.
Maruti Suzuki India Limited, Shri S.Ganesh & Shri Sunil Agrawal
for M/s. Star India P. Ltd., Shri N.Venkataraman & Shri Manoneet
Dalal for M/s. Sony India P. Ltd., Shri Ajay Vohra, Shri Neeraj Jain,
Shri Ramit Katyal & Shri Abhishek Aggrawal for M/s. Haier
Appliances India P. Ltd., M/s. Goodyear India P. Ltd. and M/s. Glaxo
Smithkline Consumer H. Ltd., Shri Mukesh Butani, Shri Rahul
Yadav & Shri Vishal Kalra for M/s. Bausch & Lomb Eyecare P. Ltd.,
M/s. Fujifilm Corporation, M/s. Canan I.P. Ltd. and M/s. Daikin
Airconditioner I. P. Ltd., Shri Ashwani Taneja, for M/s.Haier
Telecom Private Limited and Shri Vikas Srivastava, for M/s. LVMH
Watch and Jewellery I. P. Ltd. (all collectively referred to as the ld.
counsel for the interveners).
6. Though both the questions referred to this special bench are
inter-linked, still we are taking up question no. 1 first. The ld.
counsel for the assessee has assailed the impugned order on various
legal and factual issues. In so far as the first question is concerned,
we have divided such submissions into seven broader parts for the
sake of convenience, which will be dealt with one by one.
I. JURISDICTION OF TPO
II. RULE 29
III. TRANSACTION
IV. INTERNATIONAL TRANSACTION http://www.itatonline.org
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V. COST/VALUE OF TRANSACTION
VI. METHODS FOR DETERMINATION OF ALP OF
INTERNATIONAL TRANSACTION
VII. MARUTI SUZUKI‘S CASE
I. JURISDICTION OF TPO
7.1. Without prejudice to the main argument that there is no
transaction much less an international transaction of brand building
for the foreign Associated enterprise in the facts and circumstances of
the present case, the ld. counsel for the appellant strongly contended
that the TPO was not justified in assuming jurisdiction to process the
such international transaction in the absence of any reference made to
him by the AO. It was stated that the jurisdiction over a subject
matter can be acquired only after the concerned authority first
discharges the onus of proof about the satisfaction of all the pre-
requisite conditions for the assumption of such jurisdiction. Coming
to the present context, the learned counsel for the assessee contended
that the AO did not refer the international transaction of marketing
intangibles to the TPO and as such the latter was precluded from
determining the arm‘s length price (hereinafter also called `the ALP‘)
in respect of such transaction. Our attention was invited towards the
judgment in the case of CIT Vs. Amadeus (India) (P) Ltd. [(2012) 246
CTR (Del.) 338] in which it has been held that it is not within the
domain of the TPO to determine whether a particular transaction is or
is not an international transaction and then to determine the ALP
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thereof, which was not referred to him but comes to his notice during
the course of proceedings.
7.2. The ld. counsel submitted that section 92CA of the Income-
tax Act, 1961 (hereinafter also called `the Act‘) has undergone certain
changes. He referred to sub-section (2A) of section 92CA, inserted
by the Finance Act 2011 w.e.f. 1-6-2011, as per which, where any
other international transaction, apart from those referred to under sub-
sec. (1), comes to the notice of the TPO during the course of
proceedings before him, the provisions of this Chapter shall apply as
if such international transaction is an international transaction
referred to him under sub-sec. (1). The ld. AR submitted that the
newly inserted provision is applicable only w.e.f. 1-6-2011. As the
TPO passed order on 29-10-2010, the deficiency in jurisdiction
which was missing under sub-section (2), remained lacking even
with the help of sub-section (2A). Referring to sub-sec. (2B) of sec.
92CA, the ld. AR contended that this provision has been inserted by
the Finance Act 2012 with retrospective effective from 1-6-2002.
Such provision with retrospective effect cannot come to the rescue of
the Revenue to cure the defect in the jurisdiction of the TPO in
determining ALP of the international transaction because it was not
there at the time of his passing the order. In support of this
contention, he referred to the judgment of the Hon‘ble Supreme Court
in the case of CIT Vs. Max India Ltd. [(2007) 295 ITR 282 (SC)]. In
that judgment it has been held that the position of law is to be
considered as it stands on the date when the order is passed. He also
referred to the judgment of the Hon‘ble Supreme Court in the case of http://www.itatonline.org
ITA No.5140/Del/2011.
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10
Sagir Ahamad Vs. State of U.P. & others 1954 AIR 728. The ld. AR
contended that it has been held in this later case that the subsequent
amendment of Constitution of India cannot validate a prior
unconstitutional Act. He also invited our attention towards the
judgment of the Hon‘ble Gujarat High Court in the case of Avani
Export & others Vs. CIT & Others dated 2nd
July, 2012, to shore up
his submission for reading down the retrospective operation of sub-
section (2B) of sec. 92CA. The ld. counsel emphasized on giving
prospective operation to sub-section (2B) of sec. 92CA by contending
that if sub-sec. (2B) is held to be retrospective from 1-6-2002, then
all other sub-sections of sec. 92CA will become otiose.
7.3. This point was also underscored by another ld. counsel
appearing for some of the interveners. It was contended that sub-sec.
(2A) of section 92CA considers all the circumstances under which an
international transaction, other than that referred to by the AO, comes
to notice of the TPO during the course of proceedings before him. He
submitted that this sub-section unconditionally empowers the TPO to
consider any transaction which comes to his notice during the course
of proceedings before him. On the contrary sub-section (2B) has been
made applicable only in respect of an international transaction for
which the assessee failed to furnish the report u/s 92E, which is a
restricted provision. It was claimed that the mandate of sub-sec. (2B)
can apply only in respect of a transaction which is an international
transaction as per assessee‘s understanding but has not been reported.
But where a transaction is not an international transaction as per the
assessee‘s version, the same cannot be brought within the ambit of http://www.itatonline.org
ITA No.5140/Del/2011.
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sub-sec. (2B). It was submitted that if we analyze the position after
1-6-2011, being the date from which sub-sec. (2A) has been inserted,
in a way that an international transaction for which the assessee did
not furnish audit report u/s 92E as covered under sub-section (2B),
then the mandate of sub-sec. (2A) to that extent shall fail. Both the
sub-sections (2A) and (2B) of section 92CA should be interpreted as
different in content from each other. He relied on the judgment of
Hon‘ble Supreme Court in the case of Sultana Begum Vs. Prem
Chand Jain (1997) 1 SCC 373 to contend that the statute has to be
read as a whole to find out the real intention of the legislature. He
argued that if the interpretation is given to sub-sec. (2B) as
encompassing all international transactions in respect of which
assessee did not furnish report u/s 92E, then sub-sec. (2A) to that
extent shall be rendered inoperative because the contents of sub-
section (2B) in such a situation would also stand covered in sub-sec.
(2A). In his opinion, the only possible way to harmoniously interpret
sub-sections (2A) and (2B) of section 92CA is to imprison the scope
of sub-sec. (2B) with such transactions which the assessee perceives
as international transaction but fails to report.
7.4. The ld. counsel for the appellant invited our attention towards
the requirement enshrined in sub-sec. (1) of section 92CA, being the
taking of a previous approval of the Commissioner before making
reference by the AO. It was submitted that since in the instant case
the TPO himself assumed jurisdiction in determining ALP of the
international transaction, the requirement of seeking a prior approval
of the Commissioner failed. In that view of the matter also, the ld. http://www.itatonline.org
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AR submitted that the action of the TPO in determining ALP in
respect of the transaction be declared as a nullity.
7.5. The ld. DR vehemently opposed the above contention by
stating that there is no irregularity or invalidity in assuming
jurisdiction by the TPO because of the insertion of sub-section (2B)
of section 92CA with retrospective effective, covering the period
under consideration.
7.6. We have heard the rival submissions and perused the related
material on record. In order to evaluate the rival contentions in this
regard, it will be apposite to consider the relevant parts of section
92CA, as under:
―*92CA. Reference to Transfer Pricing Officer.—(1)
Where any person, being the assessee, has entered into an
#international transaction or specified domestic
transaction in any previous year, and the Assessing
Officer considers it necessary or expedient so to do, he
may, with the previous approval of the Commissioner,
refer the computation of the arm‘s length price in relation
to the said #international transaction or specified domestic
transaction under section 92C to the Transfer Pricing
Officer.
(2) Where a reference is made under sub-section (1), the
Transfer Pricing Officer shall serve a notice on the
assessee requiring him to produce or cause to be produced
on a date to be specified therein, any evidence on which
the assessee may rely in support of the computation made
by him of the arm's length price in relation to the
#international transaction or specified domestic
transaction referred to in sub-section (1).
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***(2A) Where any other #international transaction or
specified domestic transaction other than an #international
transaction or specified domestic transaction referred
under sub-section (1), comes to the notice of the Transfer
Pricing Officer during the course of the proceedings
before him, the provisions of this Chapter shall apply as if
such other #international transaction or specified domestic
transaction is an #international transaction or specified
domestic transaction referred to him under sub-section (1).
##(2B) Where in respect of an international transaction,
the assessee has not furnished the report under section 92E
and such transaction comes to the notice of the Transfer
Pricing Officer during the course of the proceeding before
him, the provisions of this Chapter shall apply as if such
transaction is an international transaction referred to him
under sub-section (1).
###(2C) Nothing contained in sub-section (2B) shall
empower the Assessing Officer either to assess or reassess
under section 147 or pass an order enhancing the
assessment or reducing a refund already made or
otherwise increasing the liability of the assessee under
section 154, for any assessment year, proceedings for
which have been completed before the 1st day of July,
2012.
*Inserted by the Finance Act, 2002, w.e.f. 1-6-2002.
*** Inserted by the Finance Act 2011, w.e.f. 1-6-2011.
# Substituted by the Finance Act 2012, w.e.f. 1-4-2013.
## Inserted by the Finance Act 2012, w.r.e.f. 1-6-2002.
### Inserted by the Finance Act 2012, w.e.f. 1-7-2012.
7.7. Sub-section (1) of section 92CA provides that where the
assessee has entered into an international transaction and the AO
considers it necessary so to do, he may, with the previous approval of
the Commissioner, refer the computation of the ALP in relation to the
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said transaction to the TPO. Thus, there is an intrinsic requirement of
seeking the approval of the Commissioner before making a reference
to the TPO u/s 92CA. As per sub-sec. (2), the TPO shall determine
the arm‘s length price of the transaction which has been referred to
him by the AO as per sub-sec. (1). A conjoint reading of sub-secs.
(1) & (2) of section 92CA makes it manifest that the TPO can
determine ALP of an international transaction only when a valid
reference is made to him by the AO and not otherwise. The judgment
of the Hon‘ble jurisdictional High Court in Amadeus (India) (P) Ltd.
(supra), has laid down that in the absence of a valid reference by the
AO, the TPO cannot determine ALP of an international transaction.
This judgment has been rendered on consideration the provisions of
sub-section (2) of section 92CA.
7.8. It is interesting to note that the Finance Act 2011 inserted sub-
sec. (2A) of sec. 92CA w.e.f. 1-6-2011. As per this provision the
TPO shall determine ALP of any international transaction, other than
that referred to him by the AO under sub-section (1), which comes to
his notice during the course of proceedings before him. This
provision has thus enlarged the jurisdiction of the TPO by
empowering him to compute ALP in respect of any transaction, other
than those referred to him by the AO, which comes to his notice
during the course of determining ALP of the referred transactions.
Consequently, the sub-section (2A) has changed the legal position as
settled by the Hon‘ble jurisdictional High Court in the case of
Amadeus (India) (P) Ltd. (supra). It is worthwhile to mention here
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Ltd. (supra), has decided the controversy in the light of sub-sec. (2)
of sec. 92CA. Their Lordships made it unequivocal at least at two
places in the judgment that their view is on the basis of provision of
sec. 92CA as applicable to the assessment year 2006-07, that is, prior
to introduction of sub-section (2A) of sec. 92CA. It thus becomes
apparent that with the insertion of sub-sec. (2A), the TPO can
compute ALP in respect of any transaction other than those referred
to him by the AO. However, it is pertinent to note that sub-sec. (2A)
has been inserted w.e.f. 1-6-2011. Thus, the mandate of sub-sec. (2A)
cannot apply to a period anterior to this cut-off date. As the TPO
passed the order in the instant case on 29-10-2010 which is obviously
prior to 1-6-2011, sub-section (2A) can not be of any help to save his
action.
7.9. Then comes the insertion of sub-sec. (2B) of section 92CA
by the Finance Act 2012 with retrospective effect from 1-6-2002. It is
significant to note that the date giving retrospective effect to this
provision coincides with the insertion of sec. 92CA itself in the
statute. As per sub-sec. (2B), where an assessee has not furnished
report u/s 92E in respect of an international transaction and such
transaction comes to the notice of the TPO during the course of
proceedings before him, it shall be considered as an international
transaction referred to the TPO under sub-sec. (1). Admittedly, the
assessee did not report the international transaction under
consideration in its report u/s 92E. Going by the prescription of sub-
sec. (2B), it becomes visible that such transaction is to be considered
as an international transaction referred by the AO to the TPO under http://www.itatonline.org
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sub-sec. (1) of sec. 92CA because it came to his notice during the
course of proceedings, after 1.6.2002.
7.10. The ld. counsel for the appellant has seriously objected to
giving retrospective effect to sub-sec. (2B). His submission has been
recorded above as per which it was tried to make out that the
subsequent amendment by way of insertion of sub-section (2B)
cannot cure the defect in the otherwise invalid jurisdiction at the time
of its original exercise. The ld. AR submitted that jurisdiction has to
be tested on the basis of the law existing at the time of assuming
jurisdiction. In this regard he heavily relied on the judgment in the
case of Max India Ltd. (supra). Let us examine the factual matrix and
the legal proposition emerging out of that case and then its
applicability to the facts of the present case. It can be noticed that the
question before the Hon‘ble Supreme Court was to examine the
validity of action of the Commissioner u/s 263. The Hon‘ble Apex
Court has held that if an issue is debatable, that goes outside the
purview of sec. 263. In this judgment, the Hon‘ble Summit Court
observed that sec. 80-HHC came to be amended eleven times and
obviously there were two views in respect of the words ―losses or
profits‖, which aspect was clarified by the 2005 amendment with
retrospective effect. The entire case has proceeded on the existence of
two views on the point, thereby debarring the Commissioner from
exercising revisional power u/s 263. Further, the Hon‘ble Supreme
Court observed that subsequent amendment in 2005, even though
retrospective, will not attract the provisions of sec. 263 as the position
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of law standing on the date of the passing of the order by the
Commissioner is to be considered.
7.11. In our considered opinion, the judgment does not support
the contention of the ld. AR. Obviously that case has advanced on the
question of two views existing on the point. There are umpteen
number of judgments to support the proposition that an action u/s 263
is barred on a debatable issue. An issue is said to be debatable when
two possible views exist on it. If the AO followed one of such
possible views, the Commissioner cannot intervene to impose the
other view by invoking jurisdiction u/s 263. It is of further
significance to note that Hon‘ble Supreme Court in that case started
with the remarks –―we express no opinion on the scope of the said
amendment of 2005‖. It is patent from these observations that the
Hon‘ble Apex Court did not go into the interpretation of the word
―profit‖ as encompassing the word ―loss‖ as well, which was the
subject matter of the 2005 amendment under consideration. It simply
decided the point in assessee‘s favour by holding that since there
were two views existing on the point, the CIT could not have
embarked upon section 263.
7.12. Presently we are concerned with the framing of assessment
and determining the question of ALP by the TPO. There is a
phenomenal distinction between the requirements for taking action
u/s 263 and framing an assessment u/s 143(3) or the other related
proceedings. Unlike sec. 263, there is no requirement that the AO/
TPO cannot decide a debatable issue. There is not and cannot be any
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law, prohibiting the AO from deciding a debatable issue in favour of
the Revenue until the dispute is finally set to rest by some legislative
amendment or by some judgment of the Hon‘ble Supreme Court or
that of the Hon‘ble jurisdictional High Court. The observations made
in the case of Max India (supra) need to be viewed in the
surroundings of the facts of that case and the legal position governing
the issue. Whereas section 80HHC was subjected to eleven
amendments and its interpretation was not free from doubt and even
the Hon‘ble Summit Court dealt with the question of validity of
action u/s 263 without expressing any opinion on the scope of the
said amendment of 2005, sub-sec. (2B) of sec. 92CA is a provision
having no shred of doubt on its construction. Its ambit is not eclipsed
by any uncertainty. There is no question of keeping its interpretation
in the arena of any debate. Even a layman will read this provision as
extending the power of TPO to such international transactions in
respect of which the assessee did not furnish audit report. In view of
the above discussion, it becomes apparent that the ratio decidendi in
the case of Max India (supra) can have no application to the facts of
the instant case.
7.13. We now consider the judgment of the Hon‘ble Gujarat High
Court in the case of Avani Exports (supra). Here also the controversy
rotates around the interpretation of third and fourth provisos to sec.
80HHC(3). Various writ petitions were filed before the Hon‘ble
Supreme Court on the constitutional validity of insertion of the third
and fourth provisos to sec. 80HHC(3) of the Act by amendment of
the Tax Laws (Amendment) Act, 2005 with retrospective effect. The http://www.itatonline.org
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Hon‘ble Supreme Court transferred these matters pending before
various High Courts to the Hon‘ble Gujarat High Court for
considering whether the severable parts of the third and fourth
provisos to sec. 80HHC(3) of the I.T. Act, 1961, were ultra virus to
Articles 14 & 19(1)(g) of the Constitution of India. After considering
elaborate arguments from both the sides, the Hon‘ble Gujarat High
Court has held the amendment to be prospective, thereby holding its
retrospective operation to be infringing the Constitution. From the
above judgment, it is clear that the Hon‘ble Gujarat High Court has
read down the retrospective effect to the amendment of sec. 80-HHC
by deciding that it shall operate prospectively.
7.14. At this juncture, it is relevant to note difference between
powers of the Hon‘ble Supreme Court and the Hon‘ble High Courts
on one hand and the Tribunal on the other on the question of deciding
the constitutional validity of a provision. It hardly needs to be
emphasized that the Tribunal is a creature of the Act and hence has
no power to declare any provision of the Act as unconstitutional,
either fully or partly. Every single provision of the Act has to be
presumed by the tribunal as a constitutionally valid piece of
legislation. The power to declare any provision as unconstitutional
lies in the exclusive domain of the Hon‘ble Supreme Court and the
Hon‘ble High Courts. Not only a provision per se but even the
retrospective effect given by the legislature to a particular provision
can also be tested by these Hon‘ble higher Courts on the touchstone
of the provisions of the Constitution of India. The tribunal can
examine the nature of amendment along with other relevant http://www.itatonline.org
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circumstances for ascertaining whether it is intended to be
prospective or retrospective, only where no retrospective effect has
been given by the Parliament to any provision. But where the
legislature has specifically given retrospective effect to a provision,
the tribunal has no power to declare the retrospective effect of such
amendment as unconstitutional, without there being any such direct
enunciation by the higher courts.
7.15. From the above judgment, it can be seen that Hon‘ble Gujarat
High Court has held the retrospective operation of the amendment to
be null and void being in contravention of Articles 14 & 19 of the
Constitution of India. It is not a case that by upholding the
constitutional validity of the retrospective amendment, the Hon‘ble
High Court has held that it can‘t apply to the cases before it. There is
a marked difference in a situation where an amendment itself is held
to be in violation of the Constitution of India and hence declared as
void and a situation in which the amendment is valid but is
interpreted as not applicable to a particular case. Whereas the
Hon‘ble Supreme Court and Hon‘ble High Courts can declare an
amendment to be unconstitutional and hence invalid, the Tribunal
cannot do so. In view of the above discussion, we are of the
considered opinion that the judgment in the case of Avani Exports
(supra) cannot be applied to the facts of the instant case to declare the
retrospective operation of sub-section (2B) of section 92CA as
unconstitutional and hence inoperative.
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7.16. Now we take up the judgment in the case of Sagir Ahamad
(supra), relied on by the ld. AR for bolstering his submission that the
subsequent insertion of sub-section (2B) of section 92CA cannot
validate the jurisdiction of the TPO which was earlier lacking. In this
case the U.P. Road Transport Act, 1951 was enacted, which was
violative of Article 19(1)(g) of the Constitution of India. Thereafter,
an amendment was carried out to Article 19(1) of the Constitution
which validated the position stated in the U.P. Transport Act. The
question arose as to whether the amendment of the Constitution,
which came later, can validate an earlier legislation which was
unconstitutional when it was passed. The Hon‘ble Supreme Court
held that the subsequent amendment of the Constitution cannot
validate or remove the unconstitutionality of an Act. It is beyond our
comprehension as to how this judgment supports the contention of
the ld. AR. We are dealing with a situation in which there is insertion
of sub-sec. (2B) of sec. 92CA with retrospective effect from 1-6-
2002. The effect of insertion with retrospective effect is that the
amendment is construed as existing from the date from which the
retrospective effect is given. It is not as if the amendment is to be
considered as effective from the date of its insertion only. If the force
of a provision is considered from the date of its insertion, then
obviously the retrospective effect given to such provision would
become meaningless. In Sagir Ahamad’s case the amendment to the
Constitution was done prospectively. That is the reason for which the
Hon‘ble Supreme Court held that the unconstitutional Act passed
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anterior to such amendment cannot be validated by a subsequent
amendment.
7.17. At this stage it is appropriate to note that sub-sec. (2B) has
been inserted by the Finance Act, 2012, whereas sub-sec. (2A) by the
Finance Act, 2011. We have noticed above that by means of insertion
of sub-sec. (2A), the TPO gets power to determine ALP in respect of
transaction not referred to him by the AO but coming to his notice
during the course of proceedings before him. Due to insertion of this
provision w.e.f. 1-6-2011, the earlier action taken by the TPO in
several cases in determining ALP of the transactions not referred to
him by the AO, remained to be saved. Thus the position of the
judgment in the case of Sagir Ahamad (supra) is akin to prevalence
of sub-sec. (2A) of sec. 92CA alone. In that case also U.P. Road
Transport Act 1951 was held to be unconstitutional despite
amendment to Article 19, which if present at the time of enactment of
U.P. Transport Act, would have made the Act constitutional.
Similarly, sub-sec. (2A) of sec. 92CA validates the determination of
ALP by TPO in respect of international transactions not referred to
him only w.e.f. 1-6-2011 and not prior to that.
7.18. Realizing that sub-sec. (2A) did not serve the purpose in
entirety to validate the action of the TPO in determining ALP in
respect of transactions not referred to by the AO, the legislature came
out with sub-sec. (2B) with retrospective effect from 1-6-2002. As
per this sub-section, any international transaction in respect of which
the assessee has not furnished report u/s 92E can be considered by the
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TPO for determining ALP. Thus, sub-sec. (2B) has the effect of
validating the action of the TPO with effect from 1.6.2002, thereby
covering even the period prior to 1-6-2011, being the date of insertion
of sub-sec. (2A) of sec. 92CA. The contention that sub-sec. (2B) of
sec. 92CA cannot be invoked to regularize the otherwise invalid
action of the TPO, in our considered opinion, is farfetched. When the
legislature in its wisdom has given retrospective effect to sub-sec.
(2B) from 1-6-2002, it is impermissible for us to hold that the
retrospectivity of this provision should be ignored and only
prospective effect be given to it. If the contention raised by the ld. AR
is accepted then the very insertion of sub-section (2B) shall become
redundant.
7.19. Here it is relevant to note that the Finance Act, 2012
introduced sub-sec. (2C) along with sub-sec. (2B) of section 92CA.
Whereas sub-section (2B) has been made retrospectively applicable
from 1.6.2002, sub-section (2C) has been given effect from 1-7-
2012. The reason is obvious when we see the contents of both the
provisions. Under sub-section (2C), the power of the AO to make
assessment or reassessment u/s 147 or pass order u/s 154 to enhance
the assessment completed before 1-7-2012, has been curtailed to the
extent the subject matter is covered by sub-section (2B). It shows that
abundant caution has been taken by the legislature in not disturbing
the finality of the assessment due to retrospective operation of sub-
section (2B) in cases set out in sub-section (2C). The acceptance of
the contention of the ld. AR to consider sub-section (2B) as
prospective, would not only make sub-section (2B) but sub-section http://www.itatonline.org
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(2C) also as dormant and non-existent. Obviously an interpretation
which makes a valid piece of legislation as redundant, does not merit
acceptance. The purpose intended to be achieved in validating the
jurisdiction of the TPO on the earlier transactions not referred to him
by the AO on one hand and also not disturbing the finality of
assessments already completed on the other, has been properly
achieved by the respective dates from which sub-sections (2A), (2B)
and (2C) have been given effect to.
7.20. The ld. counsel for the appellant also contended that if sub-
section (2B) is considered as retrospective in operation, then all other
sub-sections of sec. 92CA will loose the worth of their existence.
This argument was developed to contend that if the TPO is to be
permitted to determine ALP in respect of any transaction, then sub-
sec. (1) requiring reference to him by the AO, will be rendered
useless. In our considered opinion, this contention misses the wood
from the tree. The jurisdiction of the TPO is activate only when the
AO makes reference to him under sub-section (1) for determining
ALP in respect of certain transactions. Sub-secs. (2A) and (2B) come
into play only when sub-sec. (1) has already been set into motion.
Thus, it is only when the AO makes a reference to the TPO in terms
of sub-sec. (1) for determination of ALP in respect of the referred
international transactions, that the TPO gets power under sub-
sections (2A) and (2B) to determine ALP in respect of non-referred
international transactions as well. In the absence of any such
reference under sub-section (1), the TPO cannot suo motu undertake
the determination of ALP in respect of other international http://www.itatonline.org
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transactions not referred to him. It is a different matter that the
reference by the AO may be for one international transaction and the
TPO while determining ALP in respect of that one international
transaction, also comes across certain other international transactions
requiring determination of ALP. Thus, reference by the AO to the
TPO for at least one international transaction is a necessary
stipulation to assume power for determining ALP in respect of other
transactions.
7.21. Another point urged by the ld. counsel for the appellant was
that sub-sec. (1) requires making a reference by the AO with the
previous approval of the Commissioner. It was contended that insofar
as suo motu exercise of power by the TPO on other international
transactions is concerned, the requirement of seeking approval from
the CIT will be lacking, rendering the assumption of jurisdiction by
the TPO over such other international transactions as invalid. Here
again we find ourselves in respectful disagreement with the
submission. What sub-sec. (1) requires is that the AO should seek
previous approval of the Commissioner in respect of the transactions
for which he is making reference to the TPO. There is no
requirement of previous approval of the Commissioner in respect of
the international transactions which come to the notice of the TPO
during the course of proceedings before him. The prerequisite of
seeking approval of the Commissioner is incorporated in sub-sec. (1)
alone and the same cannot be read into sub-secs. (2A) and (2B) by
the doctrine of incorporation. Our view is fortified by the judgment of
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the Hon‘ble Supreme Court in the case of CIT Vs. Pawan Kumar
Laddha [(2010) 324 ITR 324 (SC)].
7.22. Now we take up the contention raised by the ld. counsel for
some of the interveners on harmoniously interpreting sub-section
(2B) by limiting its scope only to such transactions which the
assessee perceives as international transactions but fails to report. We
are not convinced with such interpretation. A line of distinction
sought to be drawn by the ld. counsel between two types of
international transactions for which the assessee has not furnished
audit report, viz., which is an international transaction as per
assessee‘s version and which is not so, has no statutory sanction.
There is no such cue, even remotely, in the language of sub-sec. (2B).
The reference to international transaction in sub-sec. (2B), for which
the assessee has not furnished report u/s 92E, is unqualified. If we
interpret sub-sec. (2B) in the way suggested by the ld. AR, it would
amount to doing violence to the unambiguous language of the
provision by importing certain words in it, which is obviously
impermissible. The primary rule is that of strict or literal
interpretation, as per which a provision should be read as it is unless
manifestly absurd results follow from such interpretation.
7.23. We are equally conscious of the rule of harmonious
construction as reiterated in Sultana Begum (supra). Principle 3 in
para 15 of the judgment is that ―it is to be borne in mind by all the
courts all the times that when there are two conflicting provisions in
an Act which cannot be reconciled with each other, it should be
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interpreted as if possible, effect should be given to both‖. In our
considered opinion, the rule of harmonious construction can be
applied instantly by excluding the cases in which the assessee has not
furnished report in respect of international transactions, whether or
not it is an international transaction as per the assessee‘s view point,
from the ambit of sub-sec. (2A) and including them in sub-section
(2B) of section 92CA. It is relevant to note that sub-sec. (2A) is a
general provision on the issue of the TPO suo motu taking up an
international transaction not referred by the AO, whereas sub-sec.
(2B) is a special provision limited in its scope only to such
international transactions in respect of which the assessee did not
furnish report u/s 92E. We have thoroughly discussed elsewhere in
this order that when there is special provision governing a particular
types of cases, then such cases stand excluded from the general
provision governing all the cases. As such we are of the considered
opinion that the scope of sub-sec. (2B) covers all types of
international transactions in respect of which the assessee has not
furnished report, whether or not these are international transactions as
per the assessee‘s version. The contention of the ld. counsel in this
regard is thus sans merits and is hereby rejected. We want to clarify
that the above discussion has been made only to deal with the
contention raised on behalf of some of the interveners. But for that, it
is only academic in so far as we are concerned with the present
appeal involving the A.Y. 2007-08, which is a period anterior to A.Y.
2012-13. The extant case is fully and directly covered under sub-
section (2B) of section 92CA. In that view of the matter, it becomes
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evident that no fault can be found with the jurisdiction of the TPO to
process the transaction under reference.
II. RULE 29
8.1. Before we take up various legal and factual issues raised on
behalf of the assessee, it is appropriate to mention that the ld. DR
filed two separate applications at different stages of the proceedings
before this Special bench seeking leave of the tribunal for admission
of additional evidence under rule 29 of the ITAT Rules, 1963. First
application was filed before the commencement of his arguments as
respondent, that is, after the completion of arguments by the ld. AR;
and the second was filed, at the fag end of the proceedings of the
case, that is, after the completion of rejoinder by the ld. AR.
8.2. We will deal with both the applications one by one. Through
such first application, the ld. DR sought permission to file copies of
the order passed by TPO in assessee‘s own case for A.Y. 2008-09
along with written submissions filed by the assessee before the TPO
for the said assessment year and also statements dated 10-3-2011 of
Shri Laxmi Kant Gupta, Chief Marketing Officer and Shri Arim M.
Kooliyl AGM Products Planning, both employees of the assessee. It
was contended that these documents have bearing on the issue under
consideration as they go to the root of the matter. It was also stated
that there was indeed nothing new in these documents as these were
already in the knowledge of the assessee.
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8.3. The ld. counsel for the assessee seriously objected to the filing
of such additional evidence before the Tribunal. It was submitted that
Rule 29 does not confer any right on the parties before the tribunal to
file additional evidence in the circumstances which are presently
prevailing. The ld. AR relied on CIT Vs. Rao Raja Hanut Singh
[(2001) 252 ITR 528 (Raj.)]; A.K. Babu Khan Vs. CWT [(1976) 102
ITR 757(AP)]; and CIT Vs. Babu Lal Nim [(1963) 47 ITR 864 (MP)]
to oppose the admission of additional evidence. He contended that the
Revenue should have filed such application before commencement of
the arguments by the assessee appellant, so that he could get
opportunity of replying to such documents. It was also submitted that
the Department seeks to file some new material through such
application, which material is germane to the proceedings for the
A.Y. 2008-09 and hence the same cannot be considered as significant
for the year under consideration.
8.4. We have heard the rival submissions in this regard. In order
to put this controversy to rest, it would be apposite to note down the
prescription of Rule 29 of the ITAT Rules, 1963 which is as under :-
“29. The parties to the appeal shall not be entitled to
produce additional evidence either oral or documentary
before the Tribunal, but if the Tribunal requires any
documents to be produced or any witness to be examined
or any affidavit to be filed to enable it to pass orders or for
any other substantial cause, or, if the income-tax
authorities have decided the case without giving sufficient
opportunity to the assessee to adduce evidence either on
points specified by them or not specified by them, the
Tribunal, for reasons to be recorded, may allow such
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document to be produced or witness to be examined or
affidavit to be filed or may allow such evidence to be
adduced.”
8.5. A bare perusal of the Rule reveals that the parties are not entitled
to produce additional evidence before the Tribunal. The same can be
filed inter alia, if the Tribunal requires ―to enable it to pass orders‖ or
―for any other substantial cause‖. We are not concerned with the
other part of the Rule 29. The contention raised by the ld. AR that the
Department has no right to file additional evidence under Rule 29 is
partly correct in the sense that no right vests with any party to press
for the admission of additional evidence before the Tribunal. It is the
prerogative of the Tribunal to entertain additional evidence for
enabling it to pass order or for any other substantial cause.
8.6. We find that the Revenue has invoked Rule 29 for filing
certain material which is already in the knowledge of the assessee.
Technically speaking, it is not additional evidence as it comprises of
the order passed by the TPO in assessee‘s own case for A.Y. 2008-
09; submissions made by the assessee itself and statements of the
employees of the assessee recorded by the Revenue. As will be seen
infra that the so called additional evidence is nothing but
corroboration of the material existing otherwise on which the ld. DR
has relied to bolster his submissions.
8.7. Be that as it may, it is pertinent to note that presently we are
dealing with the issue of determination of ALP in relation to
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foreign AE in this Special Bench. More than twenty parties, who
sought permission to intervene, have been permitted. Arguments
have been advanced on behalf of all of them through various ld.
counsel. The decision presently given by the Special Bench will have
binding effect over other Division Benches of the Tribunal across the
country. Through this Special Bench order certain broader principles
are going to be laid down, which will have impact over several other
cases. Since there are going to be much larger ramifications of this
order over several other cases, in our considered opinion the ends of
justice greatly demand the consideration of such additional evidence
having a direct bearing on the issue. The above enumerated factors
are sufficient to highlight the importance of the issue under
consideration and to bring it within the ambit of the expressions ―for
any other substantial cause‖ and ―to enable it to pass orders‖ as
employed in rule 29.
8.8. The Hon‘ble Delhi High Court in CIT VS. Text Hundred India
P.Ltd. [(2011)239 CTR (Del.) 263] has held that the `discretion lies
with the tribunal to admit additional evidence in the interest of justice
once the tribunal affirms the opinion that doing so would be
necessary for proper adjudication of the matter. This can be done
even when application is filed by one of the parties to the appeal and
it need not to be a suo motto action of the Tribunal.‘ It further
observed that the true test in this behalf is whether the Appellate
Court is able to pronounce judgment on the material before it without
taking into consideration the additional evidence sought to be
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under this rule is not before the Appellate Court hears and examines
the case before it, but arises when on examining the evidence as it
stands, some inherent lacuna or defect becomes apparent to the
Appellate court coming in its way to pronounce judgment. From the
above judgment it is vivid that the additional evidence can not only
be admitted on an application by the parties, but also at the suo motu
discretion of the tribunal, if it considers necessary to entertain the
additional evidence for enabling it to pass orders or for any other
substantial cause.
8.9. Insofar as the judgment in the case of Rao Raja Hanut Singh
(supra) is concerned, it is seen that the Hon‘ble Rajasthan High Court
has laid down that the admission of additional evidence at the
appellate stage is absolutely within the discretion of the Tribunal and
cannot be claimed as a matter of right. It has further been held that
the parties cannot set up an altogether new case through the
additional evidence. It will be seen on the appreciation of such
material at a later stage in this order that the additional evidence
sought to be relied by the ld. DR is not to set up a new case, but is
only in support of the reply to be given by the ld. DR on the
propositions argued by the ld. counsel for the assessee as well as the
interveners. The judgment in the case of A.K. Babu Khan (supra)
again talks of the discretion of the Tribunal in allowing or refusing to
admit the additional evidence. The case of Babulal Nim (supra), is
based on its own facts in which the assessee filed certain additional
evidence before the Tribunal at the Tribunal‘s behest. Such additional
evidence was towards setting up of an overall new case. It was in http://www.itatonline.org
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such circumstances that the Hon‘ble High Court directed to exclude
the additional evidence. In so far as the facts of the present case are
concerned, the additional evidence is not towards setting up of an
altogether new case.
8.10. Under the present circumstances, we are of the considered
opinion that the additional evidence sought to be field by the Revenue
through the first application has significant bearing on the issue
raised in this case. As there is overwhelming importance of this order,
we hereby admit such evidence for the reasons discussed
hereinabove. An announcement to this effect was made during the
course of hearing, so that both the parties may proceed accordingly.
8.11. As regards the contention of the ld. AR that the Department
should have filed such additional evidence before the commencement
of the arguments on behalf of the appellant-assessee, we note that
logic behind this contention is the adherence to the principles of
natural justice. It is axiomatic that no affected party can be denied the
opportunity to put forth his stand on the adverse material filed by the
opposite party. We indeed gave ample opportunity to the ld. AR to
controvert the additional evidence. He took one day in his rejoinder,
both the forenoon and afternoon sessions, inter alia making
submissions on such evidence, which have been duly recorded and
considered in this order at the appropriate place.
8.12. Now we take up the second application which, unlike the
first application, came to be filed by the ld. DR on the conclusion of
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the hearing of the assessee‘s case. Relying on Text Hundred India
P.Ltd.(supra), the ld. DR contended that since the power of the
tribunal extends to accepting additional evidence even after the
conclusion of hearing, there can be no embargo on his filing
additional evidence at this stage.
8.13. We are not inclined to entertain this application for admission
of the additional evidence. A line of distinction needs to be drawn
between the additional evidence proposed to be filed by the either
party and that suo motu required by the tribunal. In so far as the
additional evidence proposed to be filed by the either party is
concerned, that can be possibly requested for admission at any stage
of proceedings provided there is a scope for the other side to rebut it.
Any stage can never embrace the conclusion of hearing, that is when
the appellant as well as respondent have made submissions and
further the appellant has also concluded his rejoinder. No party can
be allowed to come up with a request for filing additional evidence at
that juncture. If such a request is acceded to, it would create an
anomalous situation in which the other party will never get chance to
refute it. It is an elementary principle of law that no one can be
condemned unheard.
8.14. In contradistinction to the right of the parties to apply for
the admission of additional evidence at the appropriate stage of
proceedings, the power of the tribunal in suo motu requiring
additional evidence cannot be curtailed even after the conclusion of
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hearing. If in the given facts and circumstances of the case it is felt
by the tribunal that consideration of some fresh evidence is essential
for the proper and effective disposal of the appeal, it can very well
require the production of additional evidence. But in that case also it
will be essential for the tribunal to refix the matter for seeking
additional evidence and getting comments of both the sides on such
evidence.
8.15. As presently we are confronted with a situation in which the
hearing of the assessee‘s case is effectively over not only by the reply
of the Revenue to the assessee‘s contentions but also by the
completion of rejoinder on behalf of the assessee to the Revenue‘s
reply, in our considered opinion the ld. DR cannot be allowed to file
additional evidence through its second application at this belated
stage. We fail to see any reason for the ld. DR in not filing such
additional evidence along with his first application which was filed at
the outset of the commencement of his arguments. We, therefore,
refuse to entertain the second application.
8.16. To sum up, out of the two applications filed by the ld. DR
under rule 29, first is allowed and the second is rejected.
III. TRANSACTION
9.1. The ld. counsel for the assessee contended that there is no
such alleged transaction of creating marketing intangible in the nature
of brand building by the assessee for its foreign AE, much less an
international transaction. It was stated that the assessee did not arrive
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at any understanding, oral or written, with its AE for promoting their
brand. All the AMP expenses were incurred in India for advertising
its products and there was no interference of the foreign AE in any
manner in this regard. He argued that it was the assessee who was
taking final decision on the question of when, where, and how the
advertisement was to be done. All the payments towards such
expenses incurred were made to the third parties and the foreign AE
was no where involved in this entire exercise. The ld. AR opposed
the view point of the Revenue in bifurcating the total advertisement
expenses into two parts, viz., first part towards the business carried
on by the assessee deductible in full in the hands of the assessee by
equating it with the proportionate amount of such expenses incurred
by the independent comparable parties; and the second part towards
the brand building for the foreign AE as not deductible. Whole of the
AMP expenses were incurred by the assessee for its own business
purpose and there was no question of spending anything exclusively
towards brand building for its foreign AE. There can be no brand
without product, which shows that all the advertisement expenses,
even though exhibiting the foreign brand, were liable to be attributed
only to the advertisement of products. He contended that when the
assessee incurred AMP expenses for its business purpose, which were
recorded as such, the Revenue was not entitled to recharacterize this
transaction by splitting it into two parts – first towards advertisement
expenses for the assessee‘s business and second towards the brand
building for the foreign AE. In support of this contention he relied on
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the judgment of the Hon‘ble jurisdictional High Court in CIT Vs.
EKL Appliances Ltd. [(2012) 345 ITR 241 (Del)].
9.2. It was stated that in order to reach any conclusion about the
assessee incurring AMP expenses towards brand building for the
foreign AE, there should be some agreement between the two for
incurring of such expenses. In the absence of any such agreement, the
existence of such an agreement cannot be inferred. He referred to sec.
92F(v) which defines the term `transaction‘ to elucidate that it talks
of agreement, understanding or action in concert. As there was no
such agreement etc. between the assessee and the foreign AE, the ld.
AR contended that it was wrong to infer it without any basis. He
relied on the judgment of the Hon‘ble Supreme Court in the case of
Daiichi Sankyo Co. Ltd. Vs. Jayaram Chigurupati & others [(2010)
157 Company Cases 380 (SC)] to contend that there can be no
presumption about the acting of two parties in concert. Even if both
the parties are related to each other, the action in concert needs to be
specifically proved. In the radiance of this judgment, it was
contended that the Revenue was wrong in drawing an inference as to
any transaction of brand building between the assessee and the
foreign AE.
9.3. The ld. counsel further argued that primarily there was no
incurring of expenses for the brand building and even if it was
presumed that some part of the assessee‘s advertisement expenses
incidentally led to the brand building for the foreign AE, then also it
cannot be considered as a `transaction‘ because there is no evidence http://www.itatonline.org
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of any prior understanding between the assessee and the foreign AE
in this regard. It was, therefore, stated that the vital ingredient of
`transaction‘, being the agreement or understanding or action in
concert between the parties, was miserably lacking in this case.
9.4. The ld. DR countered the submissions advanced on behalf of
the assessee by stating that the existence of oral agreement in the
facts and circumstances of the present case is absolutely visible. He
argued that the incurring of AMP expenses of a magnitude which
have been incurred by the assessee but which no businessman in a
commercially rational manner incurs, goes to show that there was a
tacit understanding between the assessee and the foreign AE for
creating/improving the marketing intangible of the foreign AE in
India by incurring such excess AMP expenses, which is a transaction.
In view of the above arguments it was stated that the transaction of
brand building for the foreign AE can be very well inferred from the
facts and circumstances of the present case because the assessee is a
hundred percent subsidiary of its foreign AE working at the
command of its parent company.
9.5. The ld. DR invited our attention towards certain ads given
by the assessee in newspapers showing that the brand name and the
slogan of the foreign AE were demonstrated absolutely promptly,
which proved that the assessee was acting on the instructions of its
principal company for the creation/enhancement of the brand value
also. He also opposed the argument of the ld. AR that there can be no
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ad films of LG were shown in the open court to reveal that there can
be advertisement only for brand de hors products. One such video
was shown, by which only LG brand is advertised and there is no
reference to any LG products in that video. By placing on record an
extract from www. persuasive.com on page 173 of the paper book,
the ld. DR also quoted example of brand Tommy Hilfiger, which
does not manufacture anything at its own but sells the goods under its
brand. The ld. DR submitted that there can be advertisement only for
brand and not for product or it can also be for a product coupled with
brand or only for product and not for brand. It was, therefore,
submitted that the assessee entered into agreement with its foreign
AE for advertising the brand of the later, which is nothing but an
implied transaction.
9.6. He argued that the United Nations Transfer Pricing Manual
provides for the allocation of such cost of market penetration,
marketing expansion and market maintenance strategies between a
MNE and its subsidiaries under the Transfer Pricing Regulations.
The ld. DR referred to page 74 of the paper book, being extracts from
United Nations Transfer Pricing Manuals. Para 5.3.2.5 provides that
―the allocation of the cost of these strategies between a MNE and its
subsidiaries is an important issue in transfer pricing and will depend
on the facts and circumstances of each case. It is important to
examine various factors in order to address this issue of cost
allocation between parties to the transactions.‖ He invited our
attention towards certain relevant factors relevant in this regard
mentioned in such Manual including – whether unusual intense http://www.itatonline.org
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advertising marketing and sales promotion efforts have taken place.
In the light of the above Transfer Pricing Manual of United nations,
the ld. DR contended that the incurring of unusual AMP expense
requires allocation of AMP cost between the MNE and its
subsidiaries. In so far as such allocation to the MNE is concerned, the
same is nothing but a transaction.
9.7. After considering the rival submissions and the perusing the
relevant material on record, an elementary question which falls for
our consideration is to decide as to whether there is any `transaction‘
between the assessee and the foreign AE for the brand building in
India, the legal ownership of which vests with the principal abroad. It
would be apposite to consider the definition of `transaction‘ given in
clause (v) of sec. 92F, which reads as under : -
“(v) “transaction” includes an arrangement,
understanding or action in concert, -
(A) Whether or not such arrangement, understanding or
action is formal or in writing; or
(B) Whether or not such arrangement, understanding or
action is intended to be enforceable by legal proceeding”.
9.8. From the above definition it is apparent that a transaction is
an arrangement, understanding or action in concert, whether formal
or in writing or whether enforceable or not by legal proceedings. The
case of the Revenue is that brand building by the assessee for its
foreign AE via incurring AMP expenses to the extent of more than
what other independent entities proportionately incur for
advertisement of their products in a similar situation, has resulted into
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a transaction. On the other hand, it has been argued by the ld. AR that
there is a lack of agreement or unison between the assessee and its
foreign AE on the question of incurring AMP expenses for brand
building on behalf of the foreign entity. The contention has been
made by the ld. AR that in the absence of any mutual agreement
between the assessee and its foreign AE, it cannot result into a
transaction.
9.9. We do not find any force in this contention made on behalf
of the assessee. If the unison or mutual agreement between two
parties was to be deduced only from the terms of some formal
agreement, then there was no need for the legislature to define
―transaction‖ u/s 92F inter alia to mean an arrangement or
understanding - ―(A) whether or not such arrangement, understanding
or action is formal or in writing‖. The incorporation of the words
―whether or not‖ before the words ―such arrangement, understanding
or action is formal or in writing‖, is a clear pointer to the fact that the
agreement between the two AEs can be formal or in writing on one
hand or informal or oral on the other. When there is a formal or
written agreement between two AEs, the answer to the question as to
the existence of transaction becomes patent. If, however, there is an
informal or an oral understanding, the existence of such agreement
cannot be specifically found out because of it being not express.
However, such an informal or oral agreement, which is latent, can be
inferred from the attending facts and circumstances to make it patent.
Such inference can be drawn from the conduct of the parties. It
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long as there exists some sort of understanding between two AEs on a
particular point, the same shall have to be considered as a transaction,
whether or not it has been reduced to writing. The ld. AR relied on
the judgment of the Hon‘ble Supreme Court in the case of Daiichi
Sankyo Co. Ltd. Vs. Jayaram Chigurupati & others [(2010) 157
Company Cases 380 (SC)] to bring home the point that that there can
be no presumption about the acting of two parties in concert. Nobody
can deny that there can be no such presumption. Action in concert
can only be by the meeting of minds between two or more persons
leading to the shared objective. The Hon‘ble Supreme Court observed
in this case that : ―it is another matter that the common objective or
purpose may be in pursuance of an agreement or an understanding,
formal or informal‖. In the case of an informal or oral concert, there
has necessarily to be something to indicate the concert indirectly. The
Hon‘ble Summit Court has observed in this very judgment that : ―it
is the conduct of the parties that determines their identity‖. Thus it
cannot be said that in the absence of any express agreement between
the assessee and its foreign AE for incurring AMP expenses for the
brand promotion, whose legal ownership vests with the foreign entity,
there can be no transaction. The natural upshot is that if there is no
express agreement between the assessee and its foreign AE and still
the facts and circumstances indicate that the Indian entity incurred
some AMP expenses towards brand promotion of the foreign entity,
the same shall be considered as an implied or oral transaction.
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9.10. We do not find any force in the contention of the ld. DR
that the mere fact of the assessee having spent proportionately higher
amount on advertisement in comparison with similarly placed
independent entities be considered as conclusive to infer that some
part of the advertisement expenses were incurred towards brand
promotion for the foreign AE. Every businessman knows his interest
best. It is for the assessee to decide that how much is to be incurred to
carry on his business smoothly. There can be no impediment on the
power of the assessee to spend as much as he likes on advertisement.
The fact that the assessee has spent proportionately more on
advertisement can, at best be a cause of doubt for the AO to trigger
examination and satisfy himself that no benefit etc. in the shape of
brand building has been provided to the foreign AE. There can be no
scope for inferring any brand building without there being any
advertisement for the brand or logo of the foreign AE, either
separately or with the products and name of the assessee. The
AO/TPO can satisfy himself by verifying if the advertisement
expenses are confined to advertising the products to be sold in India
along with the assessee‘s own name. If it is so, the matter ends. The
AO will have to allow deduction for the entire AMP expenses
whether or not these are proportionately higher. But if it is found that
apart from advertising the products and the assessee‘s name, it has
also simultaneously or independently advertised the brand or logo of
the foreign AE, then the initial doubt gets converted into a direct
inference about some tacit understanding between the assessee and
the foreign AE on this score. As in the case of an express agreement,
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the incurring of AMP expenses for brand building draws strength
from such express agreement; in the like manner, the incurring of
proportionately more AMP expenses coupled with the advertisement
of brand or logo of the foreign AE, gives strength to the inference of
some informal or implied agreement in this regard.
9.11. Adverting to the facts of the instant case, it is noticed that the
ld. DR has amply shown that the assessee not only promoted its name
and products through advertisements, but also the foreign brand
simultaneously, which has remained uncontroverted on behalf of the
assessee. This factor together with the fact that the assessee‘s AMP
expenses are proportionately much higher than those incurred by
other comparable cases, lends due credence to the inference of the
transaction between the assessee and the foreign AE for creating
marketing intangible on behalf of the latter.
9.12. The ld. AR has vehemently argued that when the assessee
incurred AMP expenses for its business purpose and recorded them
as such, the Revenue went wrong in recharacterizing this transaction
by splitting it into two parts, viz., one towards advertisement
expenses for the assessee‘s business and second towards the brand
building for the foreign AE. He fortified this contention by relying
on the judgment of EKL Appliances Ltd. (supra). There is absolutely
no doubt that para 17 of the judgment unambiguously lays down that
the tax administration should not disregard the actual transaction and
substitute other transactions for it. However, it is imperative to note
that the proposition laid down in para 17 is not infallible or is not an
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unexceptionable rule. Caveat has been included in the immediately
next para no. 18. Two exceptions have been carved out of the general
rule against recharacterization of any transaction as set out in para 17,
viz. ―(i) where the economic substance of a transaction differs from
its form; and (ii) where the form and substance of the transaction are
the same but the arrangements made in relation to the transaction,
viewed in their totality differ from those which would have been
adopted by the individual enterprise behaving in a commercially
rational manner.‖ In our considered opinion, the second exception
governs the extant situation, as per which, where the form and
substance of the transaction are the same, but arrangements made in
relation to transaction viewed in totality differ from those which
would have been adopted by independent enterprises behaving in a
commercially rational manner. The assessee incurred AMP expenses
and explicitly showed them as such. Thus the form of showing the
AMP expenses coincides with the substance of the AMP expenses.
But the arrangement made in such transaction, viewed in totality,
differs from that which would have been adopted by independent
enterprises behaving in a commercially rational manner. Though the
AMP expenses were shown as such but the overt act of showing such
expenses as its own is different from what is incurred by independent
enterprises behaving in a commercially rational manner, which
unearths the covert act of treating the AMP expenses incurred for the
brand building for and on behalf of the foreign AE, as also its own.
What is relevant to consider is as to whether an independent
enterprise behaving in a commercially rational manner would incur
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the expenses to the extent the assessee has incurred. If the answer to
this question is in affirmative, then the transaction cannot be re-
characterized. If, however, the answer is in negative, then the
transaction needs to be probed further for determining as to whether
its recharacterization is required. Such recharacterization can be
done with the help of the ratio decidendi of this judgment itself,
being, making a comparison with what `independent enterprises
behaving in a commercially rational manner‘ would do, tied with the
fact of the assessee also simultaneously advertising the brand of its
foreign AE. Reverting to the context of AMP expenses, one needs to
find out as to how much AMP expenses would independent
enterprises behaving in a commercially rational manner, incur. Once
by making such a comparison, the result follows that the Indian AE,
prominently displaying brand of its Foreign AE in its advertisements,
has incurred expenses proportionately more than that incurred by
independent enterprises behaving in a commercial rational manner,
then it becomes eminent to recharacterize the transaction of total
AMP expenses with a view to separate the transaction of brand
building for the foreign AE. Even the United Nations Transfer
Pricing Manual, which has only a persuasive value, provides for the
allocation of such cost between the MNE and its subsidiaries. We,
therefore, hold that in the facts and circumstances of the present case,
there is a transaction between the assessee and the foreign AE under
which the assessee incurred AMP expenses towards promotion of
brand which is legally owned by the foreign entity.
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Economic vis-à-vis legal ownership of brand
10.1. The ld. counsel for some of the interveners contended that
there are two types of ownerships of a brand, viz., legal ownership
and economic ownership. In their opinion, part of the AMP expenses
incurred in India can be construed as leading only to the building of
the economic ownership of a foreign brand, which vests solely with
the Indian assessee, thus making full AMP expenses eligible for
deduction in its hands. They submitted that the total AMP expenses
should be segregated into routine and non-routine. Whereas routine
advertisement expenses are deductible in full u/s 37(1), non-routine
expenses on advertisement should be attributed to the economic
ownership of the brand. As it is the Indian entity which acquires the
economic ownership of brand and then exploits it for making more
and more sales in India, those should also be allowed in its hands. It
was claimed that no part of AMP expenses can be allocated to the
legal ownership of brand vesting with the foreign AE, so as to call for
any disallowance in the hands of the assessee.
10.2. We do not find any weight in the contention put forth about
the economic ownership and legal ownership of a brand. It is not
denied that there can be no economic ownership of a brand, but that
exists only in a commercial sense. When it comes in the context of
the Act, it is only the legal ownership of the brand that is recognized.
If we accept the contention of the ld. AR that it be held as an
economic owner of the brand or logo of its foreign AE for the
purposes of the Act and hence expenses incurred for brand building,
which is legally owned by the foreign AE, should be allowed as http://www.itatonline.org
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deduction in its hands, then incongruous results will follow. It is
patent that a manufacturer does not ordinarily sells its goods directly
to the ultimate customers. There is normally a chain of middlemen
ending with retailer. Going by that logic and descending in the line,
the distributors or wholesalers to whom the assessee sells its goods,
also become economic owners of the brand on the parity of reasoning
that they also exploit the brand for the purpose of selling the goods to
retailers. Similarly the retailers also become the economic owners of
the brand on the premise that on the basis of such brand they are
selling the goods to the ultimate customers. All these middlemen and
the assessee can be considered as economic owners of the brand only
in a commercial sense for the limited purpose of exploiting it for the
business purpose, which is otherwise legally owned by the foreign
AE. Such economic ownership is nothing more than that. Suppose
the foreign company, who is legal owner of the brand, sells its brand
to a third party for a particular consideration, can it be said that the
Indian assessee or for that purpose the wholesalers or retailers should
also get share in the total consideration towards the sale of brand
because they were also economic owners of such brand to some
extent? The answer is obviously in negative. It is only the foreign
enterprise who will recover the entire sale consideration for the sale
of brand and will be subjected to tax as per the relevant taxing
provisions. There can be no tax liability in the hands of the Indian
AE or the wholesalers or the retailers for parting with the economic
ownership of such brand under the Act. In that view of the matter we
are of the considered opinion that the concept of economic ownership
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of a brand, albeit relevant in commercial sense, is not recognized for
the purposes of the Act. The above discussion leads us to irresistible
conclusion that the advertisement done by the assessee also carrying
the brand/logo of its foreign AE coupled with the fact that it spent
proportionately higher amount on AMP expenses, gives clear
inference of a `transaction‘ between the assessee and its AE of
building and promoting the foreign brand.
Repercussions of parent AE’s influence
11.1. The ld. DR contended that the inference of transaction of
brand building can also be drawn from the fact that the assessee and
its parent company are associated enterprises. The foreign AE
exercises complete control and influence over the economic behavior
of the assessee because of it being hundred percent subsidiary. If the
foreign entity chooses to direct the assessee to incur expenses on its
brand promotion without explicitly recording this fact in its account
books, the later cannot afford to say no. He argued that all the
arguments advanced by the ld. AR to the effect that it is solely for the
assessee to decide on the question of incurring of AMP expenses, are
based on the presumption of separate entity concept of the assessee
vis-a-vis the foreign AE, which is really not applicable in the present
case because of the relation between the two. Even though the
assessee and foreign AE are separate legal entities in two different tax
jurisdictions, the ld. DR contended that the assessee cannot be
regarded as distinct from its foreign AE. He invited our attention
towards the Foreign collaboration agreement dated 10-3-1997 which
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provides through clause 5 that the ―L.G. Electronics shall at all times
have the right to nominate all or majority of the directors on the board
of LGEIL‖. Clause 6 provides that ―L.G. Electronics shall have the
right to nominate the Chairman and the Managing Director of LGEIL
at all times‖. These clauses read in conjunction with other relevant
clauses amply prove that it is L.G. Korea which exercises complete
control over the assessee not only in nominating the Chairman and
Managing Director but also all the directors of the assessee company.
He also took us through Article 4 dealing with royalty payment under
the Technical assistance and royalty agreement dated 1-7-2001,
whose Clause 1(b) stipulates that the `licensor will advise the licensee
the rate of royalty and payment thereof on Agreed Products other
than TVs as and when the concerned division of licensor demands the
royalty payment. The licensee then will take necessary steps to take
Govt. of India‘s approval if it so required.‘ It was argued that a
perusal of the above clauses indicates that it is only LGK which
decides the rate of royalty to be paid by the assessee over the period.
On such decision taken by LGK, the assessee is supposed to take
necessary steps for obtaining the Govt. of India‘s approval, if any,
required for payment of royalty. This clause was claimed to be
proving that there is only one way traffic and there is no question of
any mutual negotiations taking place to finalise any business
decisions as happens between two independent entities. Under this
arrangement, it is only LGK which takes the final call and that has
binding effect on the assessee. He also referred to the Article 7 of
this agreement, which allows the use of ―LG‖ brand name and
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trademark. This clause provides in second para that in case at any
stage in future the licensor demands any royalty payment on this
account, the licensee will take steps to get the Govt. of India‘s
approval for payment of such royalty payment. It was stated that from
this Article it was evident that the amount of royalty to be paid by
LGI to LGK for use of its brand name falls in the exclusive domain
of LGK. The assessee has no role at all to play in such decision,
except following the dictate of LGK. The sum and substance of his
contention was that since LGK exercises complete control over the
economic decisions of LGI, the separate legal character of the
assessee should be overlooked notwithstanding the fact that LGI is a
legally separate entity.
11.2. Per contra, the learned Counsel for the assessee submitted in
rejoinder that the contention of the learned Departmental
Representative about disregarding the separate legal character of the
assessee due to the influence of the foreign AE on its economic
policies, was utterly erroneous. He relied on the judgment of the
Hon‘ble Supreme Court in the case of Vodafone International
Holdings B.V. Vs. Union of India & Anr.s [(2012) 341 ITR 1 (SC)]
in which it has been held that if there are two separate but related
legal entities, their separate legal character cannot be ordinarily
disregarded. It was submitted that the legal character can be ignored
only where the Revenue positively proves the factum of the existence
of influence of the foreign AE over the affairs of the Indian AE in
general or in respect of specific transactions. He argued that such
burden has not been discharged in the present case by the Revenue in http://www.itatonline.org
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proving that there was any influence of the foreign AE in the decision
taken by the Indian AE towards incurring of the AMP expenses in
India.
11.3. We are convinced with the submissions advanced on behalf of
the assessee in this regard but only to the extent of not ignoring the
legal character of the Indian AE simply because of the close
relationship between the two enterprises. If we proceed with the
presumption that since the foreign enterprise has influence over the
economic behavior of the assessee and hence the separate legal
character of the Indian enterprise should be overlooked, then it would
mean that the such separate legal character of the assessee will be
lost not for one transaction but for all practical purposes. In that case
only the foreign entity will survive as a taxable unit even under the
Act. Probably it is not the case of the Revenue also as it is the Indian
entity which has been subjected to the present assessment.
11.4. However, we are not agreeable with the remaining part of
the contention of the ld. AR that the legal character of one enterprise
can be altered only where the Revenue positively proves the factum
of the existence of influence of the foreign AE over the affairs of the
Indian AE in general or in respect of specific transactions. In fact, it
is due to this close relation between AEs of MNC that Chapter-X has
been enshrined in the Act as an anti-tax avoidance measure. No doubt
AEs in India and abroad are two separate legal entities subject to tax
in different tax jurisdictions, but the fact that the economic behaviour
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of one depends on the wish of the other, can never be totally lost
sight of. Due to this factor, it becomes significant to verify as to
whether the decisions taken by the Indian AE are influenced by its
foreign AE. If any decision taken by the Indian AE is found to be
uninfluenced, then the transaction is accepted as such by the Revenue
at its face value. If however it turns out that the behavior of the Indian
AE has been influenced by the foreign AE, then there arises a need
for adjustment to that extent by removing the effect of such influence.
In fact, the transfer pricing provisions (hereinafter also called `the TP
provisions‘) are aimed at discovering, in the first instance, if there is
any influence of the foreign AE over transactions between it and its
Indian counterpart ; and if the answer is in affirmative, then by
unloading the effect of such influence on the transaction. This entire
exercise is executed by firstly visualizing the value of an international
transaction between the two AEs; then ascertaining the ALP of such
transaction; and then eventually computing the total income of the
Indian AE having regard to the ALP of the international transaction.
Initial burden is always on the assessee to prove that the international
transaction with the foreign AE is at arm‘s length price.
11.5. In our considered opinion the rival parties have occupied the
position akin to north pole and south pole on this score. In the context
of the TP provisions, the correct position lies somewhere between
these two extreme ends. Whereas the separate legal character of both
the entities remains intact under Chapter-X, at the same time there is
a simultaneous mandate for removing the effect of influence of one
entity over the economic dealings with the other on a transactional http://www.itatonline.org
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level by computing the income having regard to the ALP of each
international transaction.
Whether any express agreement in this case ?
12.1. The ld. DR submitted that it is a case in which, apart from
drawing an inference as to the transaction, there was an express
agreement between the assessee and the foreign AE for incurring of
AMP expenses for branding building. He referred to certain material
indicating the Blue Ocean Strategy (―BOS‖ in short) adopted by L.G.
group. He explained the concept of BOS as not to out-perform the
competition in the existing industry, but to create new market space
or a blue ocean, thereby making the competition irrelevant. It was
stated that this creation of new markets is obviously achieved inter
alia through the vigorous campaign for the awareness of brand and
products. Our attention was drawn towards pages 102 and 106 of the
paper book containing details of BOS of the LG Electronics, which
provides that ―In January 2006, the company launched `Blue Ocean
Management‘ campaign to be one among the top three EIT firms in
the world by 2010‖. From this material, it was shown that the BOS
was implemented in January 2006, to be carried on for four five years
with a view to bring L.G. Electronics within the three top firms of the
world by 2010. It was explained that the period relevant to the
assessment year under consideration is covered under the currency of
the BOS as adopted by the LGK on a global level including India
through the assessee. A reference was made to page 132 of the paper
book as per which the assessee, that is, LGI announced to follow the http://www.itatonline.org
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footsteps of LGK in adopting the BOS. Then he referred to interview
of Mr. M.B. Shin, the Managing Director of the assessee company, a
copy of which is available on page 133 of the paper book. In response
to question as to what is the rationale behind LGI adopting the BOS
in India, Mr. Shin replied that the concept of BOS as adopted by LG
Electronics world wide, is for strengthening business capabilities and
streamlining business structure thus being able to achieve the global
top three by 2010. Mr. Gabor George Burt, in response to same
question said that ―LG is adopting the Blue Ocean Strategy (BOS) in
India as part of its global strategy.‖ The ld. DR also took us through
some other material to indicate that the task of finalizing the scheme
of advertisement under BOS and its implementation on global level
was assigned by LG Korea to LG Singapore and it was only in the
domain of LG Singapore to chalk out the advertisement strategy for
all the AEs of LGK uniformly on a global level. The ld. DR referred
to additional evidence admitted under rule 29 through his first
application to exhibit that the brand building for the foreign AE was
an important part of BOS, which the assessee admitted to have done
in India. The ld. DR energetically referred to Article 20 of Addendum
no. 1 dated 1-1-2002 to agreement dated 1-7-2001 between LGK and
LGI, a copy of which has been placed on page 58 of the paper book,
to show that it was the obligation of the Indian entity to incur all the
advertisement expenses in India.
12.2. The learned AR contended that the reliance of the learned
Departmental Representative on the BOS for making out a case that
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the assessee incurred AMP expenses at the dictate of the foreign AE,
was wrong. It was stated that the BOS is not a new strategy devised
by LG Korea, but was an already existing one. He reiterated his
earlier arguments that the entire advertisement in India was planned
and executed by the assessee alone. With the help of some papers, it
was shown by him that the foreign AE simply prescribed the size and
manner of placement of the brand and logo LG in the advertisements
to be done by the assessee in India.
12.3. After considering the rival arguments in this regard and
going through the relevant records it is clear that the LGK adopted
BOS on a global level with an aim to create new markets, which
primarily includes marketing strategy for the awareness of brand and
products. It is further evident from the interview of Mr. M.B. Shin,
the Managing Director of the assessee company that it adopted the
BOS in India as part of its global strategy. The details as referred to
by the ld. DR reveal that the entire marketing strategy of LG group
through advertising and promotion was decided globally. The
assessee and other AEs of LGK in other countries were supposed to
follow the overall strategy made by LGK. When the assessee
subscribed to BOS of its foreign AE, it cannot be contended that all
the decisions about the timing, areas and quantum of advertisement
were taken by the assessee, as was contended by the ld. AR. In fact
all such decisions are derivatives of the overall BOS formulated by
LGK. Though the ld. AR repeatedly asserted empty handedly that
advertisement in India was planned and executed by the assessee
alone, but he not only failed to support his contention but also could http://www.itatonline.org
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not place on record any contrary evidence to indicate that either the
BOS was not a strategy inter alia for advertising and marketing on a
global level or the assessee did not adopt it.
12.4. At this stage we need to consider the additional evidence
filed by the ld. DR through the first application. The assessee in
response to notice u/s 92CA for the A.Y. 2008-09 submitted before
the TPO that LG Electronics Singapore Pte. Ltd.‘s (LGESL)
Marketing division is responsible for developing a range of marketing
and sale strategy. Marketing functions are provided by LGESL to
LGEA for establishing consistent and effective marketing and
promotion strategies in the respective countries. The assessee also
submitted that the corporate marketing functions included corporate
brand management relating to LGK on a regional level. The assessee
further stated before TPO, through the above referred written
submissions, that LGESL‘s corporate Marketing division performs
the specific functions which include, ―Brand management including
Brand Health Index enhancement, customer insight enhancement,
new brand image deployment and brand campaign initiatives and
review‖. It is further relevant to consider the statement of Shri Laxmi
Kant Gupta, the Chief Marketing Officer of the assessee company
recorded on 10-3-2011. In answer to question about the building of
brand ―LG‖ in India and how LGK controls this brand in India, he
replied that ―They give us set of guidelines on how to depict the
brand in various places like advertising, shops etc‖. In response to the
next question about the names of the expatriates employed in the
marketing department and their role and responsibilities, he gave the http://www.itatonline.org
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name of Mr. Gilbert Ahn, Vice President Marketing, by stating his
role to coordinate marketing inputs between India and Korea for
smooth implementation. He also named four persons with the names
Mr. D.S. Shin (Appliances) ; Mr. Joy Seo (TV); Mr. M.J. Jeon (AC.);
Mr. G.B. Kim (DAV); and Mr. Jaesung Choi (GSM mobiles) as
assisting in the strategy and coordination of marketing development
with Korea. From the statement of Shri L.K. Gupta, it is apparent that
his assertion was on the advertising policy of the LG as a whole and
not specific to the particular year of the recording of such statement.
It cannot be said that Shri L.K. Gupta, the Chief Marketing Officer of
the assessee was oblivious of the global BOS adopted by LGK in
vogue. Not only the assessee was directly helping in brand building
for the foreign AE, but also some of its executives were actively
engaged in coordinating with LGK in the marketing development. It
can be easily noticed that the entire additional evidence sought to be
relied by the ld. DR is nothing but corroboration of the material
already existing about the BOS implemented by the assessee in India
during the period relevant to the assessment year under consideration.
In view of the above discussion, it becomes manifest that all the
arguments advanced by ld. AR about the assessee taking suo motu
decision about the advertisement have become unsustainable. The
position which emerges is that the advertisement expenses were
incurred by the assessee in furtherance of BOS adopted by its
principal on a global level. Nothing turns out of the contention of the
ld. AR that the BOS is not a strategy devised by the assessee. Even if
it is not a strategy devised by LG Korea but still the fact remains that
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LG Korea adopted this strategy, acting under which it decided the
incurring of AMP expenses under a global scheme inter alia for
promotion of the brand and logo LG in India through the assessee.
When we consider these facts in totality about the assessee adopting
the BOS framed by LGK on global level, which also inter alia, aims
at ―Brand management including …..new brand image deployment
and brand campaign initiatives and review‖, the inference as to an
informal arrangement or understanding between the assessee and its
AE for the brand building gets reinforced. Such inference is
otherwise lucidly deducible from the fact that the assessee incurred
AMP expenses more than a commercially rational person incurs for
his business coupled with the fact that it also simultaneously or
separately advertised brand/logo of its AE.
12.5. The ld. DR has placed a lot of emphasis on Addendum no. 1
dated 1-1-2002 to agreement dated 1-7-2001 between LGK and LGI,
a copy of which has been placed on page 58 of the paper book, to
contend that there was express agreement between the assessee and
the foreign AE in this regard. Article 20 of this addendum is
reproduced as under:
―Article 20 – Advertising, Marketing and Sales Promotion.
The licensee agrees to provide and make arrangements for
advertising, marketing and sales promotion in the licensed
territory for LG Products manufactured by the Licensor and
those by the Licensee at their cost.‖
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12.6. From the above Article it can be seen that it is the assessee
who agreed to make arrangements for advertising, marketing and sale
promotion in India for the LG products manufactured by it as well as
LGK. The cost of such advertising, marketing and sale promotion in
India was also agreed to be exclusively borne by the assessee. It is
not only the products manufactured by LGI for which the assessee
has undertaken to incur AMP expenses but even for the products
manufactured by LGK as well. When we view this Article, it is
found that although there are sufficient hints but it falls short of
decisively saying that there exists an express agreement for incurring
of the AMP expenses in India by the assessee for creating marketing
intangibles for and on behalf of the foreign AE.
13. Ex consequenti we hold that there is a `transaction‘ between
the assessee and the foreign AE for the promotion of brand LG in
India, which is legally owned by the latter.
IV. INTERNATIONAL TRANSACTION
14.1. Having seen that there was a transaction between the assessee
and the foreign AE, now let us examine as to whether such
transaction can be called as international transaction. It was submitted
by the ld. counsel for the assessee and some of the interveners that
even if it is treated as a transaction, but still it does not falls within
the definition of `international transaction‘ as per section 92B of the
Act. It was argued that sec. 92B refers to a transaction between two
or more associated enterprises ―in the nature of‖ purchase, sale or
lease of tangible or intangible property etc. It was submitted that the http://www.itatonline.org
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expression ―in the nature of‖ has been clarified by way of insertion of
Explanation to section 92B by the Finance Act, 2012 with
retrospective effect from 1-4-2002, but the case under consideration
does not fall in any of the sub-clauses of clause (i) of the Explanation
to section 92B so as to be called as an international transaction.
14.2. Coming a step ahead of actual international transaction as per
section 92B(1), the ld. counsel submitted that the legislature also
deems certain transactions as international transactions as per sub-
sec. (2) of sec. 92B. Elaborating sub-sec. (2) of sec. 92B, it was put
forth that a transaction with a third party is deemed as an
international transaction if there is a prior agreement in relation to the
relevant transaction between the third person and the associated
enterprise or the terms of relevant transaction are determined in
substance between such third person and the associated enterprise. It
was stated that the case of the assessee cannot be brought even within
the purview of sub-sec. (2) because there is no allegation by the
Revenue that the third parties who were paid by the assessee for
defraying advertisement expenses had any understanding with the
foreign AE so as to determine the terms of their agreements for
advertisement with the assessee. Once a transaction is not covered
under sub-sec. (1) of section 92B, the ld. AR stated that the same can
be deemed as an international transaction only when it falls under
sub-sec. (2) of sec. 92B. If a transaction does not satisfy the pre-
requisites for inclusion either in sub-sec. (1) or sub-section (2) of
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section 92B, it cannot be reckoned as an international transaction so
as to be eligible for processing under Chapter X of the Act.
14.3. The ld. AR argued that there is always some consideration for
doing any thing, without which there can be no valid agreement. It
was pointed out that no consideration moved between the assessee
and the foreign AE on account of the alleged brand building. The
assessee incurred advertisement expenses for which the payments
were made to third parties unrelated to it. Such transactions got
concluded on the incurring of advertisement expenses without any
direct or indirect involvement of the assessee‘s foreign AE. It was
stated that a transaction with a third party or a part of such transaction
cannot be called as transaction with the AE. As the entire
advertisement expenses were incurred in India vis a vis third parties,
the requirement of sec. 92B was claimed to be lacking. The ld. AR
argued that there should be a first degree nexus between the incurring
of advertisement expenses and the brand promotion for the foreign
AE so as to regard it as an international transaction. Any incidental
benefit resulting to the foreign AE, out of the expenses incurred by
the assessee in India, cannot be termed as international transaction.
As there was no transaction between the assessee and its foreign AE
insofar as incurring of AMP expenses is concerned, the ld AR argued
that the same ceased to be an international transaction. It was argued
that the present so-called transaction of brand building for the foreign
AE by the assessee is neither covered under sub-section (1) nor (2) of
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section 92B and hence the same cannot be recognized as an
international transaction.
14.4. The ld. DR contended that a careful look at sub-section (1) of
section 92B would indicate that the term `international transaction‘
has been defined in widest possible manner. Normally a provision is
either exhaustive or inclusive. Section 92B was claimed as a classic
example of a combination of both. It was explained that the
provision can be seen into three parts. First part is exhaustive as
opening with : `―international transaction‖ means a transaction ….in
the nature of purchase, sale or lease of tangible or intangible property,
or provision of services…..‘. Second part further advances the scope
of the exhaustive character by roping in `any other transaction having
a bearing on the profits, income, losses or assets of such enterprises‘.
Third part is inclusive which provides that it `shall include a mutual
agreement or arrangement between two or more associated
enterprises for the allocation or apportionment of…any cost or
expense …in connection with a benefit, service or facility provided or
to be provided to any one or more of such enterprises.‘
14.5. The ld. DR argued that the instant transaction can be viewed
as ―international transaction‖ not on one but on three different counts.
The first being, the earlier part of sub-section (1), which is in the
nature of the exhaustive part of the definition referring to `...in the
nature of ….provision of services‘. It was stated that the authorities
below have primarily viewed this transaction as in the nature of
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marketing intangible for the foreign AE, in lieu of which the foreign
AE ought to have reimbursed the assessee.
14.6. The ld. DR contended that it can also be considered as an
international transaction having a `bearing on the profits, income,
losses or assets‘ of the assessee. Bearing on the profits of an
enterprise was explained as a transaction having been recorded in
such a way that the profits of the enterprise get needlessly deflated. In
the present context, there can be deflation of profits of an enterprise,
when the expenses pertaining to the foreign AE are also claimed as
deduction by the Indian enterprise. If it amply turns out that the
Indian entity has booked certain amount incurred for its AE as its
own expense, this would have the effect of reducing the profit
without reason, thereby depriving Indian exchequer from its rightful
share of taxes. It was stated on behalf of the Revenue that the
assessee incurred AMP expenses with a tacit understanding of
creating the marketing intangible for its foreign AE. The assessee not
only claimed deduction for the AMP expenses incurred for its own
business purpose but also for the expenses towards creating or
improving the marketing intangibles of the foreign entity. This
excess claim of deduction was stated to have a direct bearing on the
profits of the assessee, thereby bringing it within the ambit of an
international transaction.
14.7. The third way of looking at this as an international
transaction was its inclusion under the relevant part of section
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or arrangement (there is an oral understanding) between two or more
associated enterprises (between the assessee and foreign AE) for the
allocation or apportionment of….. any cost or expense incurred or to
be incurred (brand promotion expenses) in connection with a benefit,
service or facility provided or to be provided to any one or more of
such enterprises (benefit, service or facility of which shall be
available to the foreign AE). It was stated that there is an agreement
between the assessee and its foreign AE under which only the
assessee was to incur all AMP expenses in India in connection with a
benefit, service or facility to be provided to itself as well as its
foreign AE. He argued that the excess of the AMP expenses incurred
by the Indian entity over what other comparable independent entities
incur in similarly placed situation, means the exclusive benefit,
service or facility to the foreign AE so as to constitute the value of
international transaction of brand building for it. That is how he
contended that the present transaction is an international transaction
from three different angles.
14.8. The ld. DR argued that the payment to third parties for
advertising is not an international transaction. It has never been the
case of the Revenue that the payment made to the third parties
towards advertisement expenses be treated as an international
transaction. He stated that rather the international transaction is
restricted to the activity done by the Indian AE in relation to foreign
AE for adding value to a brand (being an intangible property of the
foreign AE), the payment for which made by the Indian assessee is
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included in the overall AMP expenses claimed as deduction by the
assessee.
14.9. Replying to the ld. DR‘s contention that section 92B has
been worded very widely to include each and every transaction
between the two AEs within the pale of international transaction, the
ld. counsel for some of the interveners relied on the judgment in
Addtl. CIT Vs. Income Tax Appellate Tribunal & Anr. [(1975) 100
ITR 483 (AP)] to contend that simultaneous use of the words `means‘
and `includes‘ in a definition make it exhaustive and not inclusive. It
was highlighted that only the transactions set out in section 92B can
be considered as international transactions and nothing beyond that.
As the instant transaction is not covered by section 92B, it was
claimed that the same cannot be considered as an international
transaction.
14.10. After considering the rival submissions in this regard, we
have no doubt in our mind that only international transactions can be
considered within the purview of the Chapter X of the Act. Unless a
transaction is an international transaction within the meaning of sec.
92B, the same cannot be subjected to the TP provisions. The
expression `international transaction‘ has been defined under section
92B, which has two sub-sections. The first sub-section talks of actual
international transaction and the second sub-section refers to a
deemed international transaction.
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14.11. The case of the revenue is that it is an international
transaction in terms of sub-sec. (1) of sec. 92B. Let us see the
prescription of this provision, which is as under :-
“92B. Meaning of international transaction.—(1) For
the purposes of this section and sections 92, 92C, 92D
and 92E, “international transaction” means a
transaction between two or more associated
enterprises, either or both of whom are non-residents,
in the nature of purchase, sale or lease of tangible or
intangible property, or provision of services, or lending
or borrowing money, or any other transaction having a
bearing on the profits, income, losses or assets of such
enterprises and shall include a mutual agreement or
arrangement between two or more associated
enterprises for the allocation or apportionment of, or
any contribution to, any cost or expense incurred or to
be incurred in connection with a benefit, service or
facility provided or to be provided to any one or more
of such enterprises.”
14.12. After sub-section (1), there is sub-section (2) followed by
the Explanation with two clauses, inserted by the Finance Act, 2012
w.r.e.f. 1.4.2002 starting with the expression : ` For the removal of
doubts‘. Clause (i) of the Explanation provides that ―the expression
`international transaction‘ shall include - ‖. Then there are five sub-
clauses from (a) to (e). Clause (ii) of the Explanation provides that
―the expressions `intangible property‘ shall include -‖. Then there are
twelve sub-clauses from (a) to (l).
14.13.1. Firstly we shall evaluate the rival contentions about the
definition of `international transaction‘ u/s 92B, being exhaustive or
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inclusive. It is noticed that such definition as per sub-section (1) uses
both the words `means‘ and `includes‘ at two different places. A
definition is exhaustive when it incorporates the word `means‘ in its
opening part and thereafter lists out certain items, say A and B. In
that case it will mean that only A and B form the content of the thing
defined. A definition is inclusive when it uses the word `includes‘ in
its opening part and thereafter lists out certain items, say A and B. In
that case it will mean that not only A and B but also other items not
listed, say C or D, can also form the content of the thing defined, if
these are otherwise of the same nature. If however a definition
includes both the words `means‘ and `includes‘, that is, it says that it
means `A‘ and includes `B‘, then it will again mean that it is an
exhaustive definition to include both A and B and not C or D etc. A
definition despite being exhaustive can still be inclusive, if one or
more of its components are again defined in an inclusive manner.
Suppose in the definition of the third category discussed above,
having both A and B by use of the words `means‘ and `includes‘, the
contents of either A or B are both are further defined in an inclusive
manner, this definition will again become inclusive to the extent of
the definition of either A or B or both having been defined in an
inclusive manner.
14.13.2. Turning to the definition of international transaction as per
sub-section (1) of sec. 92B it is noticed that it uses both the words
`means‘ and `includes‘. When we examine the Explanation to this
section clarifying the meaning of the expression `international
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transaction‘ and `intangible property‘, then it becomes clear that both
have again been defined in inclusive manner. Even though sub-
clauses (a) to (c) and (e) of clause (i) of the Explanation defining
`international transaction‘ are exhaustive, but sub-clause (d) being the
`provision of services‘ is again inclusive as `including‘ provision of
market research, market development, marketing management,…‘. It
is of critical importance to observe that the expression `international
transaction‘ itself has been defined in this Explanation only in an
inclusive manner. As a result of insertion of the Explanation with
retrospective effect, the otherwise exhaustive definition of
`international transaction‘ given in sub-section (1) has been converted
into an inclusive one. Clause (ii) of the Explanation also defines the
expression `intangible property‘ in an inclusive manner. Sub-clause
(a) of clause (ii) embraces `marketing related intangible assets‘ in the
ambit of intangible property, which is again not exhaustive because
of the use of the expression `such as‘ before `trademarks, trade
names, brand names, logos‘. From the above examination of section
92B in entirety, it can be easily noticed that the legislature has given
very extensive and inclusive meaning to the expressions
`international transaction‘ and `intangible property‘.
14.14. When we read sec. 92B(1) it comes to fore that in order to
be characterized as an international transaction, the following salient
features must be present : -
(1) There should be a `transaction‘
(2) Such `transaction‘ should be between two or more
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(3) Such transaction should be of the nature as referred
to in section 92B.
14.15. In the earlier part of this order, we have held that the brand
building by the assessee for its foreign AE constitutes a `transaction‘.
So far as the second requisite is concerned, there is no dispute on the
fact that LG Korea is an associated enterprise of the assessee. Thus,
there are two AEs in the present case and one of them, namely, LGK
is a non-resident. This condition also stands satisfied.
14.16. The third requisite is that the `transaction‘ as per the first
requisite must be of the nature as referred to in section 92B. All the
three requisites must be cumulatively satisfied so as to make a
`transaction‘ an `international transaction‘. If there is a transaction
between two AEs and one or both of whom are non-residents, it will
not become an international transaction so as to fall within the
domain of Chapter-X, unless it is of the nature as defined in section
92B.
14.17. It has been vigorously argued by the ld. counsel for the
assessee and some of the interveners that clause (i) of Explanation to
section 92B gives meaning to the expression `in the nature of
international transaction‘ and since sub-clauses (a) to (e) of clause (i)
do not refer to transaction of brand building, it cannot be considered
as an international transaction. We are not persuaded by this
submission. It is pertinent to note that the expression `international
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`include’ five sub-clauses. Thus the meaning assigned to
`international transaction‘ as per clause (i) of the Explanation is
simply inclusive and not exhaustive. There is hardly any need to
burden this order with the ratio decidendi emanating from a plethora
of judgments that the scope of an inclusive definition always extends
beyond the specified inclusions.
14.18.1. Now we will examine as to whether this transaction falls
within any of the sub-clauses of clause (i) of Explanation to section
92B. The learned counsel for the assessee contended that the view
point of the ld. DR that the transaction of brand building is in the
nature of `provision of service‘, is not tenable. He submitted that
Indian entity is engaged in the business of manufacturing and selling
of electronic goods etc. and not in rendering services of
advertisement and promotion of a brand to its customers. His
contention was that in order to bring any transaction within the scope
of `provision of services‘, it is sine qua non that the main business
activity of the Indian enterprise and the nature of service provided to
the foreign AE must be same. As it is not so in the present case, the
ld. AR contended that the transaction cannot be held as a `provision
of service‘.
14.18.2. We do not find any force in this submission advanced on
behalf of the assessee for the reason that the language of section 92B
simply mandates the ‗provision of services‘ by one AE to another. It
is not qualified by any words to restrict its scope only to such services
as are provided by the assessee in its regular course of business. What
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is significant in this regard is the factum of rendition of service,
which is an international transaction. Source of service is
inconsequential. It can be produced by the AE as primarily engaged
in the business of rendering such service or it can be produced by the
Indian AE otherwise than by being primarily engaged in such
business or it can be outsourced. The fact that the Indian entity is
rendering any service to the foreign AE, which is not its main
business, would not convert the otherwise international transaction
into a non-international transaction.
14.18.3. Ordinarily a service may be professional, public or a
business service. Even in common parlance provision of service
means the act of performing a task for a person which that person
requires it in exchange for some consideration. Cl. (i) of Explanation
to section 92B defining `international transaction‘ includes through
sub-clause (d) : `provision of services, including provision of market
significant economic conditions (v) comparing of property or services
and (vi) market strategies, location, savings, etc.
18. The methods to determine arms length price of tangible
property are (i) comparable controlled price (CUP) method (ii) Result
Price Method (3) CUP plus method (4) ( if none of the above applied)
appropriate method is comparable profits method; profits supplied
method; unspecified method.
The CUP method is one comparable uncontrolled price method, which is
defined as transfer price method that compares the price for property
or services transferred in a controlled transaction to the prices charged
for property or services transferred in a comparable uncontrolled
transaction in comparable circumstances. Thus, CUP method is the
most direct and reliable method.
The resale price method measures the value of functions performed
and is ordinarily used in cases of purchase and resale of tangible
property in which the reseller has not added substantial value to the
tangible goods by physically altering the goods before resale
(packaging, re-packaging, labeling or minor assemble do not constitute
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physical alteration). This method is not an ordinarily used where the
controlled taxpayer uses in its tangible property to add substantial
value to the tangible goods.
Cost Plus Method is ordinarily used in cases involving the manufacture,
assembly, or other production of goods, that are sold to related parties.
Comparability under this method is dependent on similarity of functions
performed, risks borne and contractual terms, and adjustments to
account for the effects of any such differences.
With respect to intangible property, the methods which apply are
(i) Comparable uncontrolled transaction method which evaluates
whether amount charged for controlled transfer of an intangible
property was at arm’s length by reference to the amount charged in
comparable uncontrolled transactions. This method requires that
controlled or the uncontrolled transactions involve either the same
intangible property or comparable intangible property. The burden of
proof is always on the taxpayer .
Transactional Net Margin Method (TNMM) is applied in a case where
the sale its products to its subsidiary and makes no uncontrolled sales
in geographic market, but there are other players, who sell similar
product to other distributors in that market. The uncontrolled
distributors purchase the product from unrelated parties, but there is a
difference in that they do not have the brand names. Because reliable
assessments cannot be made for the brand name, the CUP method
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cannot be used. But when there is a close functional similarity between
controlled and uncontrolled function in terms of market in which they
occur the volume of the transactions, the marketing activities
undertaken by the distributor, inventory levels, fluctuation of currency
risks and other relevant functions and risks and reliable adjustments
can be made for similar difference in payment terms and inventory
levels for same differences in payment term and inventory level, re-sale
particulars method just a higher degree of comparability and thus
provides a reliable measures on arms length result. It is preferred over
TNMM. TNMM is preferred to costly price method but costless method
is preferred to TNMM.
TNMM is another method which provides a practical solution to
otherwise insolvable transfer pricing problem. This method is used
where net margins are determined from the uncontrolled transaction of
the same taxpayer in comparable circumstances, or comparable
transactions of two independent enterprises with the material
differences affecting price between the associated and independent
enterprises having been adjusted. If not adjusted, the method is not to
be used. This method requires comparison between income derived
from the operations of the uncontrolled parties and income derived by
an associated enterprise from similar operations. The TNMM is a
modified, cost +/- resale price method. Price guidelines defined it as
the method, which examined the net profit margin relating to an
appropriate base ( for e.g. costs, sales, assets ) that taxpayer realizes
from a controlled transaction. This method is used where CUP or resale
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or cost plus method cannot be applied. In this method focus is on
transactions rather than business line or the operating income of the
company. As regards comparability, the focus is on comparability in
the transaction and enterprises rather than on the same level of
comparability in product and function has required in traditional
method. This is based on net profit margin relative to anappropriate
base – costs, sales, assets- which the taxpayer makes from a controlled
transaction. This method has been aptly described in Rule-10(B)(1)(e)
of the Income Tax Rule as under:-
(e) transactional net margin method, by which,—
(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
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(v) the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction.
And I think that my above observations still holds good, even in the
given facts and circumstances of the case.
42. So, by now it has become clear that, under the Act what is
required to be ‘adjusted’ is the ‘price’ of an International Transaction.
One cannot first presume that there exists an international transaction
and then by assigning some price to it and by arriving at a conclusion
that its price is not at arm’s length make adjustment under Section 92
of the Act. This Idea is against the very ‘spirit’ of international-
taxation. The objective of the Chapter X or for that matter is to ‘make
adjustments’ to the price of an international transaction, which the
entities may have shifted from one jurisdiction to another jurisdiction.
When no ‘price’ is shifted to a different jurisdiction, how can it be
dealt with under Chapter X and how an ‘assumed price’ can be taken
for ALP adjustments. It is not permissible under the Act. What
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transfer pricing adjustment can be made in India are circumscribed by
Section 92 of the Act.
43. The Act does not speak about intangible and abstract
transaction. What the department is trying to bring home to us is that
there exists an ‘intangible-transaction’ between the parties as
canvassed, inferring unwritten agreement via unwritten understanding
between the wholly owned assessee and its foreign parent AE to create
an ‘intangible asset’ (marketing intangible). Chapter X is a complete
and self-contained code which contains all relevant provisions of
transfer pricing provisions apart from those set out in the Rules. A
transfer pricing adjustment is to be made within the four-corners of
Chapter X. This chapter provides for substitution of an arm’s length
price for a contract-price in an international transaction. This is the
only TP adjustment which is authorized and permitted under the Act.
Chapter X deals with the price part of a contract and does not deal
with the ‘quantity part of goods or services.
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44. “The assessee should have been compensated to the extent non-
routine AMP expenses” is the main plank of the revenue which cannot
be equated with an ‘international transaction’ much more than a
‘transaction’. This phrase ‘should have been compensated’ refers only
to a subjective approach of the taxman in the given facts and the
circumstances of a case.
45. Let us think in a different way by treating ‘the entire expenses
incurred on AMP towards ‘brand-building, maintaining, brand -
promoting and brand-strengthening, and the conclusion that ‘product-
promotion’ is only incidental. This can be impressive argument in the
given facts of the case particularly when the assessee is 100%
subsidiary of its foreign AE. When ‘product-promotion’ is incidental
then by applying the same analogy as is being applied, incidental
benefit arising to it would not require incurring of any AMP
expenditure and therefore, entire expenses are to be treated as
‘brand-promotion’ expenses. Fine, this is another way of drawing
inference from the given facts of a case. In case of LG as it was
demonstrated with the help of slide-show that the whole
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advertisement is for brand-building. Then the entire expenses must be
compensated by the AE, or else entire expenses can be treated as
MNE’s income, if one further enlarges one’s presumption. According
to me, the stand taken by the Revenue is not staid and firm, it is only
dilly-dallying. They are treating the “should have been compensated”
statement as an “International transaction” with reference to the
alleged non-routine expenditure incurred towards AMP expenses, as
found, after comparing with similar, not-so similar or not similar
entities who are also incurring such expenses. But would it be a
correct method to arrive at the existence of an international
transaction in this way as has been done by the revenue. According to
me, no, not at all. This procedure is not laid down in our law.
46. In my view what revenue could have done in such a case is that
‘such and such portion’ of AMP expenditure should be treated towards
‘brand royalty’, as it is so accepted in such like or alike cases. In that
view of the matter, it could be presumed that an unwritten
understanding exists between the parties because for user of brand
something is required to be paid to its owner. But, a question would
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then arise that the ‘Brand-royalty’ is paid to its legal owner only when
they allow the use of its brand by any third party. When one thinks
that whatever is earned by a MNE who is 100% subsidiary of its AE,
then by enlarging this theory, it can be safely said that even the
existence of the assessee benefits its AE. Thus, whatever is earned as
income by it pertains to its AE, then why it is being taxed in India. In
that case, the entire income needs to be taxed in foreign jurisdiction.
In this way, we would reach at a ridiculous conclusion. The MNE exist
in India under the authority of law and treated as separate legal
entities. Whatever is permitted by law cannot be allowed to be
treated illegal. The assessee is doing business in India and is also
paying taxes on its income. The assessee has a right to derive as
much is legally possible. It is the duty of the ‘tax-man’ to check any
illegal pilferage of tax but such shifting of benefit but by remaining
within the four-corners of the law of the land, otherwise the policy of
the Government, who wants foreign investment in India towards
establishment of infrastructure creation of more jobs for its youths
and strengthen economy, would utterly be defeated.
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47. The Revenue has taken the stand that the T.P. Regulations
proceed on the assumption that separate legal entity in a
multinational group does not have economic independence to take
vital policy decisions. That AMP expenses are incurred as part of global
strategy to promote the brand and/or capture markets or to sustain
the market share. That AMP expenditure is an ‘international
transaction’ within the meaning of Section 92B. That under the
amended provisions, TPO has the necessary powers to examine under
certain circumstances an international transaction even if there is no
specific reference of such a transaction from the A.O. that the burden
to demonstrate that the price of an international transaction is at
arm’s length is on the tax-payer under the India TP Regulations. That
AMP expenses go to build the brand owned by the parent company.
That Indian entity incurs the expenditure for building the brand for
and on behalf of AE. That the provisions of Section 37(1) and those of
Chapter X operate in different fields and one does not militate
(hinder) against the other. That the parent company cannot
completely disassociate itself from AMP expenses either in the manner
of planning, strategy and budgeting of such expenditure nor can it
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assets that it does not enjoy the fruits of such expenditure. That the
‘Brightline’ has been adopted by the TPO only as a tool to arrive at the
direct cost of expenses attributable to the brand promotion. That
adjustments have been made as per the method prescribed under the
Act. That that TP regulation stipulate arm’s length price of a
transaction and application of TNMM to benchmark one set of
transactions by itself cannot be a sanction for non-determination of
ALP of a different transaction. That it would be unwarranted and
impractical for the Revenue to define the manner or mode for
incurring the expenditure and to characterize or re-charactage them
into one or the other kind. That the degree and extent of risk borne by
the Indian entity may be factor of comparability but the arm’s length
price for the cost of service provided to the Associated Enterprises and
fee for services would still need to be determined.
48. The oppugned submissions on behalf of the taxpayers are that
the issue of ‘AMP’ expenses incurred in relation to unrelated third
parties in India, does not tantamount to a ‘transaction’ much less an
‘international transaction’ and is not governed by Section 92 and 92B,
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as there is no written / oral, agreement, understanding or concert
between the AE and the Indian Company, so it is not a ‘international
transaction’. The AMP expenses depended on local needs, capacity
etc. That there is no such direction from the Parent Company, to
incurred expenditure. That neither the assessee referred such a
transaction nor such reference was made by the A.O. or TPO . That the
AMP expenses incurred by the assessee have not resulted into any
benefit and has not created any intangible for its foreign AE. That
expenses on AMP is an allowable revenue deduction even if it results in
some indirect benefit to a third party i.e., the AE. That adjustment
not made based on any of the methods prescribed in Transfer Price
Regulations is not sustainable. That when the assessee is using royalty
free trade mark it would not be a case of TP adjustment. That if the
AMP expenditure created economic ownership for the Indian entity, it
cannot be regarded as service to AE as an expenditure cannot create
ownership in favour of one entity and at the same time also be
regarded as service to another entity. That economic ownership and
service are mutually exclusive. That when AMP expenses are
subserving assessee’s objective and if any benefit to overseas entity
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has occurred it can be only incidental. That the classification of
routine and non-routine may vary from assessee to assessee; from
market to market; from time to time; depending upon the product
cycle. That due attention needs to be given to assessee’s business
profile, competitive landscape and broader industry trends. Because
the AMP for Pharma, auto, consumer goods, consumer electronics and
luxury goods are going to be governed by different consideration. That
determination of provision of services should be subject to a vigorous
FAR analysis and benchmarking of the same for determination of ALP
should be subject to the standard comparability criteria. Such like host
of arguments were advanced for and against this issue by both sides.
49. The word ‘transaction’ takes its legal colour from the definition
of the term “agreement” given is section 2 of the Indian Contact Act.
Accordingly to which there must be ‘promisor’ and ‘promisee’, and at
the desire of the promisor, the promisee either does or abstains from
doing it. Thus a transaction cannot be a unilateral act and it involves
more than one person (or entity).The definition of ‘transaction’ has
been provided in clause (v) of Sec. 92F, which is inclusive one. This
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definition opens with ‘transaction’ includes, meaning thereby,
whatever definition is assigned to an agreement it is further enlarged
and under this Act any arrangement, understanding or action in
concert, are also included, apart from what is ordinarily and genuinely
it is understood to mean. This ‘inclusion’ is further qualified by
assertions that the above these’ inclusives may be ‘formal’ / informal
or may be in writing / or oral. These may be intended to be
enforceable in law or may not be so enforceable’ so the definition of
‘transaction’ ordinarily ‘understood’ has been further enlarged.
50. In my considered opinion, the burden to prove “that incurring of
AMP expenses to the extent of more than what other independent
entities proportionately incur towards advertisement of their
products, in a similar situation, has resulted into a transaction and
that these expenses are incurred for brand building on behalf of the
foreign parent entity which is so manifestly inferred from the conduct
of the parties that there exists an arrangement /understanding /
action between the assessee and its foreign AE, which has resulted
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into an international transaction for which ALP, adjustment is required
under the Act”, is on the Revenue.
51. It was argued from assessee’s side that the burden to establish
this alleged international transaction is on the Revenue. In the opinion
of the department this ‘AMP expenditure’ tantamount to an
international transaction, within the meaning of Section 92B of the
Act. That under the amended provision, TPO has the necessary powers
to examine, under certain circumstances, any international transaction
even if there is no specific reference of such a transaction to him from
the A.O, and that the burden to demonstrate that a particular
international transaction is at arm’s length is on the tax payer under
Indian TP regulations. That when AMP expenses go to build the brand
owned by the parent company, the Indian entity has incurred this
expenditure for building brand for and on behalf of the AE, which
should be compensated to that extent, can be inferred from the facts
/ circumstances of a given case and the conduct of the parties.
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52. It cannot be denied, rather it is the law of the land that under
the transfer pricing regulations the burden to prove that, ‘a
transaction is not at arm’s length’ always remains on the Revenue. As
per Rule 10D the onus to maintain the requisite records and documents
is on the assessee. Thus, in terms of Section 92C, the burden to prove
that the computation of ALP by the assessee in relation to an int.
transaction is not appropriate and requires adjustment is always on
the Revenue. Section 92 (2), 92B(1) r.w.s. 92(F)(v), when read
conjointly, clearly suggest that an allocation or apportionment or
adjustment is contemplated only under expressly defined conditions as
specified there-under. Undeniably, there is no deeming fiction in
Chapter X and the corresponding Rules to assume/presume that every
transaction or action done by the Indian entity which is wholly owned
company of its foreign AE, is influenced by its foreign master or
principal, and whatever is whispered even clandestinely by the Indian
Company would translate into an int. transaction. There is no such
presumption in law, or even under chapter X of the Act. The Revenue
cannot deduce whatever it wants to from the given facts and the
circumstances of a case. The inference which is permitted, even under
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Section 92F(v), has to be based on some material; it cannot be entirely
‘subjective’ in any case. The subjective inference based on objective
material like any candid arrangement / understanding etc., has to be
established and objectively demonstrated, wherefrom, it can be safely
deducted that there exists an int. transaction between the AEs. The
AMP expenses vis-a-vis its impact on brand if is not found palpable it
cannot be treated as an international transaction. The intention of the
law is not to treat every international transaction as not at arm’s
length. And similarly, it would be over-reaching and blowing out of
proportion if every 100% subsidiary entity of a foreign AE in India, is
treated as a creation for manipulation for the benefit of its foreign AE.
No one can deny that any foreign entity – a multinational entity come
here to do business for a profit and not for charity. They want to make
profit to the fullest possible and at the same time it is not only the
right but even duty of a ‘taxman’ to ferret out such a transaction to
bring under Chapter X of the Act. But it cannot be illogical and purely
based on guess work and sheer assumption and presumption derived
from one action which is not found as ‘avoidance of tax’.
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53. By no stretch of imagination a philosophy of ‘Blue Ocean
Strategy’ [BOS], which may have been adopted by L.G. Group, globally
to create new market space or a blue ocean, thereby making the
competition irrelevant, can help the revenue to infer any such
international transaction, as they have done. The reason for my above
epilogue is that the LG brand is already well established in the context
of India. The vigorous campaign throughout the length and breadth of
our country, of LG Brand will only help the sale of LG Brand products
and in no way it can be treated as an effort to bolster the ‘brand’.
The brand in vacuum has zilch value. When the Brand ‘LG’ is heard and
seen on TV or read in print media, anybody and everybody would make
out a picture in their minds of one or the other ‘product’ of LG brand.
Nobody cares and remembers as to how the brand ‘LG’ looks; what
colours are used therein etc. The simple glimpse of the ‘brand-name’
is bound to create a ‘picture’ of its products only.
54. As per section 101 of the Indian Evidence Act, 1872, whosoever
desires any court to give judgment as to any legal right or liability
dependent on the existence of facts which he asserts must prove that
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these facts exist. In this case therefore, the burden to prove, that the
alleged AMP expenses are a result of a tacit understanding between
the Indian companies and its foreign AE to built/promote LG brand, is
on the revenue. The revenue has not been able to discharge this
burden, in my opinion. When it has been held in the proposed order
that actual comparables have not been considered then in that
eventuality, how one can arrive at proportionately higher AMP
expenses having been incurred in this case. That so-called non-routine
or more that required expenses theory, has to tumble down and thus,
the very basis of presumption of ‘Revenue’ vanishes, resulting into
absence of any such international transaction between the AEs.
55. I would go to the extent in saying that after products of LG have
been amply advertised and thereafter only the brand name is
advertised, which is admittedly India specific, it will only and only
enhance the sale of LG products, in India, and it cannot be treated
even partly towards brand-building.
56. It is true and cannot be denied that when the brand LG is
promoted and its value stays put, it can be sold or otherwise used and
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its benefits can be taken by its owner only. Fine, but when the Indian
entity is its foreign owner’s wholly owned entity, in that case, benefit
will definitely accrue or arise to it also, may be indirectly, and that
‘indirect-benefit’ when transferred then it can be taxed in India, in
view of the amended provisions of the Act. So, where is the question
of ‘avoidance of tax’. The assessee has made huge-profits which has
been subjected tax in India. Other items which are treated as
international transaction have been dealt with by the ‘taxman’ by
making requisite adjustments under Chapter X of the Act. The entire
AMP expenses, were paid to third party in India, to which we are
concerned have also suffered tax in Indian jurisdiction, which is
admittedly not related to the assessee or its AE. So, where the
question of applying provisions of Chapter X of the Act, in the way it
has been done arises in this case. When the department alleges that
‘brand’ promotion of foreign AE’s brand has taken place, it has to be
proved and simply by inference, no such conclusion can be drawn
under the Act. Therefore, before invoking transfer price provisions,
the TPO has to first prove that there exists an international
transaction in this regard, and thereafter by showing that its price is
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not within Arm’s Length he can make necessary adjustments as per
law.
57. There should be some proof of creation of marketable intangible,
before any further step can be taken in that direction. Admittedly,
the advertisement expenses are of Revenue in nature. The expenditure
incurred in one year on advertisement may not travel to even next
year as the memory of consumers is very short. The following decisions
support my above conclusion :-
1. In CIT Vs. Berger Paints [India] Ltd 254 ITR 503 (206)
wherein it has been held that advertisement expenditure is
generally of revenue in nature since the memory of purchasing
market is short and the advertisement is required to be done
from year to year.
2. In CIT Vs. Jai Parabolic Springs Ltd. 306 ITR 42 (Del) it has
been held that there was no prohibition on the powers of the
Tribunal to entertain an additional ground which according to
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the Tribunal arose in the matter and for the just decision of the
case. There was no infirmity in the order of the Tribunal.
3. In CIT Vs. Brilliant Tutorials P. Ltd 292 ITR 399 (Mad) it has
been held that as regards advertisement it was not denied that
the expenditure incurred was for the purpose of business and the
possible benefit in future did not militate against the claim for
expenditure in the present. Hence, considering the scope of
section 37, the Tribunal correctly held that the assessee was
entitled to the deduction sought for.
58. As I have already touched the issue, the guidelines, be it that of
OECD or that U.N., they come into play, only if India has no
reservations towards them, and that too, only after a transaction is
brought under Chapter –X of the Act. So, to rely on these guideline
when the ‘transaction’ has not been brought under Chapter X is of no
moment, and does not subserve any fruitful purpose. Likewise, how
the assessee can be supposed to seek compensation for AMP
expenditure which is not consistent with the character of business of
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the assessee. It may be easy to say that the parent company cannot
completely disassociate itself from AMP expenses either in the manner
of planning strategy and budgeting of such expenditure and it may also
enjoy the benefits arising therefrom, but it is very difficult to translate
this philosophy into action to the hilt, to establish that verily some
‘marketable intangible’ has taken birth and at the cost of the assessee
it has flourished although it is owned by its foreign AE. I am not in
agreement with the assertion of the Revenue that there is no concept
of ‘commercial ownership’ of a brand which is legally owned by
someone else. A commercial ownership is a reality in the modern
global business realm and it is as good as a legal ownership in so far as
its effects on sale of products in India is concerned. The brand name
and its products have a very piquant relationship; when a ‘brand’ has a
high name, its products have higher sales, and if brand earns a bad
name, the sale of its products would be adversely effected. A bad-
name comes to a ‘brand’, only because of its products when they don’t
satisfy customers. So, the brand may be directly and even ‘inversely’
proportional to sale of its products; but converse is not true. In case,
the product of a brand has a higher name, its brand will be
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emboldened but if the products have bad name the name of that brand
in the ‘foreign countries’ may not be affected. Therefore, any
advertisement which is product-centric, and for that matter of even
entirely brand-centric, it will only enhance the sales of the products of
that brand in India. In no way, the brand owner will be benefited. It
is more the reason in case of a wholly owned entity because any
benefit derived by the foreign company will directly and
proportionately benefit the Indian company. Therefore, this is not a
case of brand-building/promotion. Hence, no such ‘covert
transaction’ between the Indian entity and its foreign AE, can be been
culled out and presumed or inferred by the TPO/AO in the given facts
and the circumstances of this case. Thus, the department has not been
able to discharge its burden which is cast upon it by the precincts of
the provisions contained in Chapter X of the Act. The assessee has
only incurred expenditure towards advertisement to sell its products.
No proof regarding rendering of any service towards brand-building, is
brought on record by the Revenue. Therefore, only presumption or
assumption at all stages cannot be and should not be approved to
replace an ‘evidence’.
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59. For the purposes of section 92, 92B, 92C, 92D and 92E,
‘international transaction’ means a transaction between two or more
AEs [one of whom should be a non-resident]. What is the nature of
this transaction? It is either –
(i) a purchase, sale; or
(ii) lease of intangible or intangible property; or
(iii) provision of services; or
(iv) lending/borrowing of money; or
(v) any other transaction having a bearing on the profits,
income, losses or assets of such enterprises
It also includes :- [‘It’ refers to a ‘transaction’]
(i) a mutual agreement or arrangement between them for the
allocation or apportionment of, or any contribution to –
Any cost or
expense,
incurred or to be incurred in connection with such service,
benefit or facility provided or to be provided to any one or more
such enterprises
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60. Sub-section (3) of section 92 envisages a situation wherein
computation of income arising from an international transaction having
regard to the arm’s length price [or allowance for any expenses or
interest arising from an international transaction] has the effect of
reducing the income chargeable to tax or increasing the loss when
computed on the basis of the entries made in the books of account in
respect of the previous year in which the international transaction was
entered into. In that eventuality, provisions of section 92 shall not
apply. What this provision signifies and resembles a situation when
the computation of income of a particular assessment year, on the
basis of books of account of previous year, goes below disclosed
income. The declared income has to be accepted and the
computation taking the income below the declared one has to be
ignored. To further simplify, the purport of 92 (3) is that the
computation of income from an international transaction having
regard to ALP should not be allowed to fall below the income
disclosed from this ‘international transaction’ by the in its books of
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account. The term ‘international transaction’ is singular and not
plural. It is not ‘international transactions’.
61. In no way it signifies that section 92 prescribes different
methods of computation of income from different ‘international
transactions’ provided under the Act and Rules. In my opinion,
these provisions don’t speak of fixing higher ALP, in whatever
manner and b applying any of the methods provided under Rule
10B. Rule 10B. These provisions don't speak about any set-off and
nobody can infer such a course from Section 92(1) + 92(3) or
otherwise. No forum or authority or court has a vested right or duty to
compute income from an international transaction by applying any
Method not prescribed in the Act or the Rules, at least in the
assessment year 2007-08. For one international transaction for the
purposes of sub-section (1) of section 92C, the most appropriate
method (of the methods provided under Rule 10B) which is best
suited to the facts and the circumstances of that particular
international transaction, which is most reliable one, shall be applied.
And, if the application of that most appropriate method reduces
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income or increases loss arising from that international transaction
which can be computed as per the books of accounts, that
computation has to be ignored and the book result has to be
accepted.
62. The definition of any word or term, expression or phrase, which
is in the form of a noun, is its denotation or signification of a term
[word etc.] may be made specific by either including something in or
by excluding something from it. It does not mean that the definition
can either be ‘inclusive or ‘exclusive’. It can add [include] something
to, or / and exclude [substract] something from the general definition
provided when an expression ‘means and includes’ is used to define a
word, it is only enlargement of its normal meaning by adding such
‘inclusive[s]”, to make it comprehensive. The definition of a word
etc., is always exhaustive; even if it is included in or extracted from
it, specifically. Thus, a definition of a term etc, is its exhaustive
definition with or without there being ‘inclusives’ or ‘exclusives’. So,
in my opinion, the definition of an ‘international transaction’ as per
section 92B is not classic as has been canvassed by the ld. D.R. Sub-
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section (2) of section 92B deems a transaction between ‘other person’
and the AE as an international transaction.
63. In my considered view, the impugned transaction does not fit in
any part of the definition of an ‘international transaction’. It is not at
all a ‘provision of service’. The assessee has not provided any such
service - directly or indirectly to its AE, as has been alleged. The
assessee has been pursuing its business activities in the manner which
in its opinion increases or would increase its turnover of the year. The
assessee in my opinion has not created, improved or maintained the
marketing intangible for its foreign AE. So, no question of any sort of
compensation arises in this case. The ld. D.R., and for that matter,
the ld. TPO/A.O. is reading too much between the lines. If one goes
by the canvassed definition of an ‘international transaction’, as has
been done in this case, anything and everything can be brought under
the definition of the term ‘bearing on the profits, income, losses or
assets’ of the assessee or its AE. If this contention is accepted, then
anything and everything done or not done by the assessee can be
brought to tax as an income from an ‘international transaction’. For
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example, if the assessee reduces sale-price to compete in the market
which increases volume of income but it may have a bearing on the
profit as the net-profit is bound to decrease, or the net profit rate is
bound to fall, then, in that case, particularly in the case of this
assessee who is a hundred per cent subsidiary of its AE, who is
benefitted with increase in income, the ‘reduced-sale-price’
cumulatively, has to be treated as an ‘international transaction’. In my
view, it would amount to far fetching the meaning of the term
‘international transaction’. This is not at all the case where the
assessee has claimed expenses relating to its AE. The ld. D.R. has
been fair enough to accept that the payment to third-party or parties
[who are Indian assessees], has not been treated as an ‘international
transaction’. The payment made to third-party for advertisement in
the Indian territory, for the purpose of enhancing its sale, and by
drawing benefit of the foreign trade-mark/brand/logo, also cannot and
should not be read in a different manner.
64. The explanation appended to section 92B, which was inserted
vide the Finance Act, 2012, w.r.e.f 1.4.2002 [i.e. from the very
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inception of section 92B] does not enlarge the scope of section 92B
and does not, in fact, widen the ‘exhaustive’ definition of the term
‘international transaction’. This explanation only ‘explains’ the
words, terms, etc. used in the main section, as enumerated above.
Explanation (i)(a) clarifies as to what is the ‘tangible-property’, used
in section 92B(1) and to be very specific, building …..etc. have to be
named. By (i)(b), this Explanation clarifies by naming specific
‘intangible properties’. Likewise, other sub-clauses (c) to (e) have
clarified capital financing; provision of services and a transaction of
business. Through Explanation (ii), it has further clarified the
expression “intangible property’ to include :
(a) marketing related intangible assets, such as, trademarks, trade names, brand
names, logos;
(b) technology related intangible assets, such as, process patents, patent
applications, technical documentation such as laboratory notebooks, technical
know-how;
(c) artistic related intangible assets, such as, literary works and copyrights, musical
compositions, copyrights, maps, engravings;
(d) data processing related intangible assets, such as, proprietary computer
software, software copyrights, automated databases, and integrated circuit
masks and masters;
(e) engineering related intangible assets, such as, industrial design, product
patents, trade secrets, engineering drawing and schema-tics, blueprints,
proprietary documentation;
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(f) customer related intangible assets, such as, customer lists, customer contracts,
customer relationship, open purchase orders;
(g) contract related intangible assets, such as, favourable supplier, contracts,